ISLA: Bond lending drop-off drives H1 revenue shortfall
30 August London
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The International Securities Lending Association’s (ISLA’s) latest report has confirmed fears of a market-wide revenue drop-off in the first half of the year.
The report highlighted the need for market participants to adapt to the new regulatory frameworks and new demands of counterparties in order to course-correct as more changes are yet to come.
IHS Markit data found that, while global on-loan volumes have stayed “broadly unchanged” at €2.2 trillion since its last report in March, revenues from securities lending overall fell 15 percent in the first six months of the year compared with the same period in 2018.
By asset class, ISLA noted that government bond lending saw the largest drop-off of 24 percent in reported fees, compared to the same period in 2018.
The report stated that the decline was caused by the growth in available supply combined with the slowdown in demand for high-quality liquid assets (HQLA) in Europe. In a statement on drivers behind the disappointing revenue results, ISLA noted that there was a fall-off in demand to borrow HQLA just as the European Central Bank’s quantitative easing stimulus programme came to an end.
Commenting on the results, ISLA explained that the spike in Europe into the half-year end “may have been owing to borrowers who were long equity securities and were looking to effectively swap them for government bonds via the securities lending markets for balance sheet and reportable risk-weighted asset purposes”.
The results are in stark contrast to last year, when the industry saw the highest annual revenue for securities lending since the financial crisis in 2008. Industry experts suggested that this was driven primarily by emerging markets, global credit uncertainty, and central bank tightening.
Meanwhile, government bonds being made available for lending did appear to show new supply coming into the market, increasing by 13 percent to €2.8 trillion, ISLA revealed.
Of this ISLA said: “As insurers take advantage of all-time record low yields, these securities are finding their way into lending programmes as holders look to maximise returns.”
“Government bond lending represented circa 43 percent of all securities on-loan globally, highlighting its continued important to overall secondary market liquidity and the role of securities lending in the context of high-quality liquid assets.”
The report highlighted the need for market participants to adapt to the new regulatory frameworks and new demands of counterparties in order to course-correct as more changes are yet to come.
IHS Markit data found that, while global on-loan volumes have stayed “broadly unchanged” at €2.2 trillion since its last report in March, revenues from securities lending overall fell 15 percent in the first six months of the year compared with the same period in 2018.
By asset class, ISLA noted that government bond lending saw the largest drop-off of 24 percent in reported fees, compared to the same period in 2018.
The report stated that the decline was caused by the growth in available supply combined with the slowdown in demand for high-quality liquid assets (HQLA) in Europe. In a statement on drivers behind the disappointing revenue results, ISLA noted that there was a fall-off in demand to borrow HQLA just as the European Central Bank’s quantitative easing stimulus programme came to an end.
Commenting on the results, ISLA explained that the spike in Europe into the half-year end “may have been owing to borrowers who were long equity securities and were looking to effectively swap them for government bonds via the securities lending markets for balance sheet and reportable risk-weighted asset purposes”.
The results are in stark contrast to last year, when the industry saw the highest annual revenue for securities lending since the financial crisis in 2008. Industry experts suggested that this was driven primarily by emerging markets, global credit uncertainty, and central bank tightening.
Meanwhile, government bonds being made available for lending did appear to show new supply coming into the market, increasing by 13 percent to €2.8 trillion, ISLA revealed.
Of this ISLA said: “As insurers take advantage of all-time record low yields, these securities are finding their way into lending programmes as holders look to maximise returns.”
“Government bond lending represented circa 43 percent of all securities on-loan globally, highlighting its continued important to overall secondary market liquidity and the role of securities lending in the context of high-quality liquid assets.”
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