Sovereigns keen on securities lending
11 October 2016 New York
Image: Shutterstock
Sovereign institutions are considering expanding their commitment to securities lending to increase returns and to help alleviate what they perceive as a threat to liquidity in the financial markets, according to a new survey.
BNY Mellon and the Official Monetary and Financial Institutions Forum (OMFIF) surveyed two dozen sovereign institutions with combined assets under management greater than $4.7 trillion.
Their survey, whose results were reported in Mastering Flows, Strengthening Markets: How Sovereign Institutions Can Enhance Global Liquidity, revealed that 75 percent of the respondents are willing to allocate 10 to 15 percent of their balance sheets for securities lending activities, with some respondents reporting they are considering using 60 percent of their assets.
Some 70 percent of the respondents said they expect an additional return of five to eight basis points from these activities.
“Global liquidity has been strained since the financial crisis, driven by market disruption, regulation and policy action,” commented Hani Kablawi, head of investment services for Europe, the Middle East and Africa at BNY Mellon.
“Besides seeing this as an opportunity to grow returns and reduce costs, sovereigns see themselves as having the ability to mitigate some of the threat to global liquidity that market participants are facing.”
“Increasing sovereign fund participation in securities lending activities would benefit the financial markets by enhancing the liquidity in a wide range of assets. Doing so could compensate somewhat for the reduction in market-making activities by banks and broker-dealers,” argued Brian Ruane, executive vice president and CEO of BNY Mellon’s broker-dealer services business.
BNY Mellon and OMFIF’s report noted that regulations such as Basel III implemented after the financial crisis have raised the cost of balance-sheet intensive activities such as securities lending for banks and dealers, leading to greater risk aversion.
Actions taken by central banks, such as highly accommodative monetary policy, low interest rates and asset purchase programmes, have also contributed to lower liquidity, according to the report.
Ruane commented: “The bond buying programmes have removed just the type of safe assets that are in high demand, while the demand for these assets has increased significantly. Even though liquidity appears to be sufficient today, that could change if central banks become more restrictive. We have already seen the sensitivity of markets to indications that the US Federal Reserve might tighten monetary policy.”
Sovereign institutions looking to move into securities lending need to become more connected with key market participants such as custody banks, central clearing counterparties, and triparty repo providers, according to the report, in order to overcome challenges in counterparty risk, credit risk, collateral risk and cash collateral reinvestment.
BNY Mellon and the Official Monetary and Financial Institutions Forum (OMFIF) surveyed two dozen sovereign institutions with combined assets under management greater than $4.7 trillion.
Their survey, whose results were reported in Mastering Flows, Strengthening Markets: How Sovereign Institutions Can Enhance Global Liquidity, revealed that 75 percent of the respondents are willing to allocate 10 to 15 percent of their balance sheets for securities lending activities, with some respondents reporting they are considering using 60 percent of their assets.
Some 70 percent of the respondents said they expect an additional return of five to eight basis points from these activities.
“Global liquidity has been strained since the financial crisis, driven by market disruption, regulation and policy action,” commented Hani Kablawi, head of investment services for Europe, the Middle East and Africa at BNY Mellon.
“Besides seeing this as an opportunity to grow returns and reduce costs, sovereigns see themselves as having the ability to mitigate some of the threat to global liquidity that market participants are facing.”
“Increasing sovereign fund participation in securities lending activities would benefit the financial markets by enhancing the liquidity in a wide range of assets. Doing so could compensate somewhat for the reduction in market-making activities by banks and broker-dealers,” argued Brian Ruane, executive vice president and CEO of BNY Mellon’s broker-dealer services business.
BNY Mellon and OMFIF’s report noted that regulations such as Basel III implemented after the financial crisis have raised the cost of balance-sheet intensive activities such as securities lending for banks and dealers, leading to greater risk aversion.
Actions taken by central banks, such as highly accommodative monetary policy, low interest rates and asset purchase programmes, have also contributed to lower liquidity, according to the report.
Ruane commented: “The bond buying programmes have removed just the type of safe assets that are in high demand, while the demand for these assets has increased significantly. Even though liquidity appears to be sufficient today, that could change if central banks become more restrictive. We have already seen the sensitivity of markets to indications that the US Federal Reserve might tighten monetary policy.”
Sovereign institutions looking to move into securities lending need to become more connected with key market participants such as custody banks, central clearing counterparties, and triparty repo providers, according to the report, in order to overcome challenges in counterparty risk, credit risk, collateral risk and cash collateral reinvestment.
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