ISLA: Drift towards non-cash markets reaching natural ceiling
12 September 2018 London
Image: Shutterstock While the attitude towards cash collateral has changed over time, the general drift towards non-cash markets globally may be reaching something of a natural ceiling, according to a collateral dynamics report by the International Securities Lending Association (ISLA).
The association’s Securities Lending Market Report, released on 10 September, stated: “The US or North American securities lending business model has developed around the use of cash collateral, with lenders typically receiving additional alpha in respect to the reinvestment of the cash received.”
The role of these cash collateral reinvestment activities in the context of the 2007/2008 crisis is well documented and formed part of a review undertaken by the Financial Stability Board, ISLA said.
ISLA added: “As other dynamics have emerged, such as the role that non-cash collateral transactions can play in terms of balance sheet optimisation, we have seen most of the
market move in this direction.”
As it looked at the market in the period prior to the half-year end, ISLA said it observed a natural fall-off in trading activity.
Elsewhere, in terms of international outlook, as at 29 June, of the circa €1.3 trillion of assets held in tri-party in Europe, there was a subtle shift in terms of asset composition from the position reported as at 29 December 2017.
ISLA found equities as a collateral class fell from 48 percent as at 29 December 2017, to 46 percent of total reported collateral as at 29 June.
The association stated: “Much of that gap was replaced with government bonds that increased from 41 percent to 44 percent over the same time. This change raises some interesting questions as borrowers would not routinely opt to use more government bonds as collateral.”
ISLA concluded: “We believe that this type of analysis and monitoring allows all relevant industry stakeholders to better understand these dynamics set against the backdrop of global financial stability.”
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