GFF: Fragmentation and rising political polarisation challenge 2025
30 January 2025 Luxembourg
Image: Daniel_Tison
Geopolitics and collateral optimisation were at the centre of discussions at Deutsche Börse Group’s Global Funding and Financing (GFF) Summit in Luxembourg.
Representatives from both the buy and sell sides shared their insights at the ‘Securities lending: Voices from across the value chain’ panel.
The moderator opened the debate by outlining key challenges expected to shape the global securities finance landscape in 2025.
These included concerns over inflation and sluggish growth, rising political polarisation and social unrest, as well as the fragmentation of global trade due to protectionism.
He added that market data shows both opportunities and risks arising from the recent political changes — for instance, supply chain disruptions and trade restrictions could create opportunities for securities lending but also expose institutions to increased counterparty risk.
The panel heard that the ongoing impact of geopolitical events on the securities lending market often presents itself through changes to both programme parameters and strategies, as well as online balances and lending values.
The panel emphasised the importance of diversifying portfolios across countries and asset types to mitigate geopolitical risks.
By holding a range of asset classes — equity, fixed income, and alternative assets — investors can better manage the heightened volatility in specific regions.
The discussion also stressed the need to term out financing to avoid short-term vulnerabilities, drawing on lessons from the Russia-Ukraine scenario.
Extending the duration of financing agreements helps reduce exposure to sudden changes in market conditions, such as those triggered by geopolitical events or shifts in monetary policies.
On the agency lending side, panellists explained how they are balancing increased risk with client demands for higher returns.
Collateral optimisation strategies emerged as a central focus, with some clients exploring more bespoke trade activities and providers offering full indemnity to protect clients against counterparty risk in case of default.
The panellists agreed that managing the quality and liquidity of collateral helps reduce the cost of financing and mitigates counterparty risk.
Sell side participants pointed to a rise in collateral upgrade trades, where lower-quality collateral is exchanged for higher-quality assets to maintain liquidity and satisfy regulatory requirements.
This relates to the growing participation of cash-rich clients, such as money market funds, in collateral optimisation, as these clients can provide higher-quality collateral.
The speakers also identified opportunities in cross-currency trades, where securities are lent in one currency while borrowing in another, as highly beneficial in a volatile market, as they provide additional flexibility and diversification for collateral management.
The discussion also touched on the effects of interest rate volatility and regulatory changes, with panellists sharing their strategies for managing these challenges.
Treasury functions are increasingly focused on anticipating structural shifts and diversifying funding sources.
Furthermore, they are implementing more sophisticated hedging strategies, using instruments such as interest rate swaps and bond futures, to manage the financial risks posed by fluctuating rates, the panel heard.
Looking ahead, the panel agreed that adaptability will be crucial in navigating future uncertainties, whether it be the potential impact of US policies under the new administration or broader geopolitical shifts.
Additionally, recent developments in emerging markets, such as Latin America, the Middle East, and Southeast Asia, might open up new securities lending avenues.
Representatives from both the buy and sell sides shared their insights at the ‘Securities lending: Voices from across the value chain’ panel.
The moderator opened the debate by outlining key challenges expected to shape the global securities finance landscape in 2025.
These included concerns over inflation and sluggish growth, rising political polarisation and social unrest, as well as the fragmentation of global trade due to protectionism.
He added that market data shows both opportunities and risks arising from the recent political changes — for instance, supply chain disruptions and trade restrictions could create opportunities for securities lending but also expose institutions to increased counterparty risk.
The panel heard that the ongoing impact of geopolitical events on the securities lending market often presents itself through changes to both programme parameters and strategies, as well as online balances and lending values.
The panel emphasised the importance of diversifying portfolios across countries and asset types to mitigate geopolitical risks.
By holding a range of asset classes — equity, fixed income, and alternative assets — investors can better manage the heightened volatility in specific regions.
The discussion also stressed the need to term out financing to avoid short-term vulnerabilities, drawing on lessons from the Russia-Ukraine scenario.
Extending the duration of financing agreements helps reduce exposure to sudden changes in market conditions, such as those triggered by geopolitical events or shifts in monetary policies.
On the agency lending side, panellists explained how they are balancing increased risk with client demands for higher returns.
Collateral optimisation strategies emerged as a central focus, with some clients exploring more bespoke trade activities and providers offering full indemnity to protect clients against counterparty risk in case of default.
The panellists agreed that managing the quality and liquidity of collateral helps reduce the cost of financing and mitigates counterparty risk.
Sell side participants pointed to a rise in collateral upgrade trades, where lower-quality collateral is exchanged for higher-quality assets to maintain liquidity and satisfy regulatory requirements.
This relates to the growing participation of cash-rich clients, such as money market funds, in collateral optimisation, as these clients can provide higher-quality collateral.
The speakers also identified opportunities in cross-currency trades, where securities are lent in one currency while borrowing in another, as highly beneficial in a volatile market, as they provide additional flexibility and diversification for collateral management.
The discussion also touched on the effects of interest rate volatility and regulatory changes, with panellists sharing their strategies for managing these challenges.
Treasury functions are increasingly focused on anticipating structural shifts and diversifying funding sources.
Furthermore, they are implementing more sophisticated hedging strategies, using instruments such as interest rate swaps and bond futures, to manage the financial risks posed by fluctuating rates, the panel heard.
Looking ahead, the panel agreed that adaptability will be crucial in navigating future uncertainties, whether it be the potential impact of US policies under the new administration or broader geopolitical shifts.
Additionally, recent developments in emerging markets, such as Latin America, the Middle East, and Southeast Asia, might open up new securities lending avenues.
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