Equities as collateral on the rise
09 March 2016 New York
Image: Shutterstock
Post-crisis regulatory and macro-economic trends have turned conventional wisdom in the securities lending market on its head, bringing equities as collateral to the fore, according to Steve Kiely, BNY Mellon’s head of securities finance new business development for Europe the Middle East and Africa.
The rise of equity as collateral is a key symptom of this new post-crisis regulatory landscape, argues Kiely in a BNY Mellon Focus on Regulation Readiness article on the top securities lending trends to watch in 2016.
The percentage of non-cash collateralised securities lending trades has been steadily rising for several years now.
The latest International Securities Lending Association industry report claims that non-cash collateral rose from 55 percent in the H2 2014 to 60 percent in the H1 2015.
Kiely points out that 57 percent of securities held in Europe’s four largest triparty providers, including BNY Mellon, were equities at the end of June 2015, up from 53 percent six months earlier.
But where some regulations giveth, others taketh away, according to Kiely. While Basel III’s liquidity coverage and net stable funding ratios are widely considered to be primary drivers behind the trend, other regional market regulations stop it in its tracks.
Kiely does not refer directly to US Securities and Exchange Commission Rule 15c3-3, which prohibits certain funds from accepting equities as collateral, but does allude to the fact that “regulatory issues may stay the hand of certain buy-side market participants—such as public sector pension schemes or mutual funds subject to UCITS V”.
“But other securities lenders can benefit from as much as a doubling of revenues on individual transactions by accepting equities as collateral.”
“In the prevailing environment, this could be the difference between making a trade or not.”
Kiely concludes by stating: “18 months ago, the use of equity collateral was an emerging trend. Now, it is so dominant that market participants are being disadvantaged if they do not follow suit.”
Term trades and collateral consolidation were also highlighted as the second and third most important growing trends in 2016.
The rise of equity as collateral is a key symptom of this new post-crisis regulatory landscape, argues Kiely in a BNY Mellon Focus on Regulation Readiness article on the top securities lending trends to watch in 2016.
The percentage of non-cash collateralised securities lending trades has been steadily rising for several years now.
The latest International Securities Lending Association industry report claims that non-cash collateral rose from 55 percent in the H2 2014 to 60 percent in the H1 2015.
Kiely points out that 57 percent of securities held in Europe’s four largest triparty providers, including BNY Mellon, were equities at the end of June 2015, up from 53 percent six months earlier.
But where some regulations giveth, others taketh away, according to Kiely. While Basel III’s liquidity coverage and net stable funding ratios are widely considered to be primary drivers behind the trend, other regional market regulations stop it in its tracks.
Kiely does not refer directly to US Securities and Exchange Commission Rule 15c3-3, which prohibits certain funds from accepting equities as collateral, but does allude to the fact that “regulatory issues may stay the hand of certain buy-side market participants—such as public sector pension schemes or mutual funds subject to UCITS V”.
“But other securities lenders can benefit from as much as a doubling of revenues on individual transactions by accepting equities as collateral.”
“In the prevailing environment, this could be the difference between making a trade or not.”
Kiely concludes by stating: “18 months ago, the use of equity collateral was an emerging trend. Now, it is so dominant that market participants are being disadvantaged if they do not follow suit.”
Term trades and collateral consolidation were also highlighted as the second and third most important growing trends in 2016.
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