BNP Paribas: HQLA to remain strong driver
18 February 2019 Paris
Image: Shutterstock
Within European fixed income, lending high-quality liquid assets (HQLA) will remain a strong driver as borrowers impacted by regulation continue to create demand, reflected BNP Paribas Securities Services' Adnan Hussain.
According to Hussain, global head of agency securities lending and head of MFS UK, the regulation driving change in borrower behaviour and collateral includes the supplemental leverage Ratio (SLR), the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR).
These requirements are natural drivers for HQLA demand, so the ability to lend these assets on a term structure instead of overnight will be highly sought, he revealed.
Additionally, they anticipated a trend for borrowers to look to place more varied types of non-cash collateral.
Hussain explained that agents will need to assist lenders to understand the inherent risks, as well as equipping them with the tools to manage them.
He also noted that political uncertainty, including Brexit, is a potential driver of underlying demand because this could lead to increased volatility.
Hussain cited: “We also remain hopeful that gradually improving Eurozone economics will lead to an increase in merger activity, creating opportunities for securities lending.”
Meanwhile, in the US, BNP Paribas anticipate that markets will continue to be impacted by volatility created through monetary policy and continued political tensions.
Additionally, the steepening LIBOR curve will provide an opportunity for beneficial owners to capture higher yields on their reinvestment portfolios.
Hussain said: “The ability to lend general collateral and reinvest the cash collateral into a pool of diversified money market instruments enables clients to derive additional return.”
He explained that this strategy is highlighted by the continued inflows of securities lending cash collateral into prime money market funds.
“Since the implementation of the Securities and Exchange Commission’s (SEC) 2a-7 money market reform, beneficial owners continue to allocate a portion of their cash collateral to higher yielding investments to capture this market inefficiency.”
Turning to the Asia Pacific, it was noted that key revenue opportunities lie in the acceptance of Korean, Taiwanese and China A-shares and continued appetite to borrow HQLA such as Australian Government bonds (ACGB’s).
Hussain commented: “We see significant opportunities for agency-lending in South Korea and Taiwan. General collateral levels have normalised in recent years for South Korea, as the onshore lending market has grown and liquidity of supply has increased.”
He added: “However, it is still a ‘specials’ driven market, generating high returns on lendable assets.”
According to Hussain, global head of agency securities lending and head of MFS UK, the regulation driving change in borrower behaviour and collateral includes the supplemental leverage Ratio (SLR), the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR).
These requirements are natural drivers for HQLA demand, so the ability to lend these assets on a term structure instead of overnight will be highly sought, he revealed.
Additionally, they anticipated a trend for borrowers to look to place more varied types of non-cash collateral.
Hussain explained that agents will need to assist lenders to understand the inherent risks, as well as equipping them with the tools to manage them.
He also noted that political uncertainty, including Brexit, is a potential driver of underlying demand because this could lead to increased volatility.
Hussain cited: “We also remain hopeful that gradually improving Eurozone economics will lead to an increase in merger activity, creating opportunities for securities lending.”
Meanwhile, in the US, BNP Paribas anticipate that markets will continue to be impacted by volatility created through monetary policy and continued political tensions.
Additionally, the steepening LIBOR curve will provide an opportunity for beneficial owners to capture higher yields on their reinvestment portfolios.
Hussain said: “The ability to lend general collateral and reinvest the cash collateral into a pool of diversified money market instruments enables clients to derive additional return.”
He explained that this strategy is highlighted by the continued inflows of securities lending cash collateral into prime money market funds.
“Since the implementation of the Securities and Exchange Commission’s (SEC) 2a-7 money market reform, beneficial owners continue to allocate a portion of their cash collateral to higher yielding investments to capture this market inefficiency.”
Turning to the Asia Pacific, it was noted that key revenue opportunities lie in the acceptance of Korean, Taiwanese and China A-shares and continued appetite to borrow HQLA such as Australian Government bonds (ACGB’s).
Hussain commented: “We see significant opportunities for agency-lending in South Korea and Taiwan. General collateral levels have normalised in recent years for South Korea, as the onshore lending market has grown and liquidity of supply has increased.”
He added: “However, it is still a ‘specials’ driven market, generating high returns on lendable assets.”
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