Europe loves equity but cash is king in US
07 May 2010 London
Image: Shutterstock
A new report shows US-domiciled securities lenders are overwhelmingly focused on cash as collateral, whilst many other jurisdictions have a propensity to accept non‐cash collateral.
The report, from data and analytics provider Data Explorers, argues that the use of liquid equities as collateral was instrumental in mitigating risk following the collapse of Lehman Brothers.
"Collateral is an essential component of securities lending transactions," said Mark Faulkner, head of innovation at Data Explorers. "What one accepts and how it performs is of critical importance, especially when things go wrong, as in the
case of Lehman."
The Data Explorers report: Accepting Equities as Collateral: The European Lenders' Experience was commissioned by the Risk Management Association (RMA) and forms part of its submission to US regulators.
The report highlights the overwhelming reliance on cash collateral by US domiciled institutions. This contrasts heavily with other countries, such as the UK, where cash accounts for only 21 per cent of collateral and Canada, which has seen reliance on cash almost halve to 20 per cent over a three year period.
"With investor protection at the forefront, US regulators such as the SEC (mutual funds) and the Department of Labor (pension funds) may wish to reflect on positive European experiences to ascertain the potential benefits of adopting international collateral practices," added Faulkner. "Cash remains an important component of collateral, but we believe it should form part of a balanced portfolio."
The debate of cash over equity will be discussed at the Securities Financing Forum on 26 May in New York.
The report, from data and analytics provider Data Explorers, argues that the use of liquid equities as collateral was instrumental in mitigating risk following the collapse of Lehman Brothers.
"Collateral is an essential component of securities lending transactions," said Mark Faulkner, head of innovation at Data Explorers. "What one accepts and how it performs is of critical importance, especially when things go wrong, as in the
case of Lehman."
The Data Explorers report: Accepting Equities as Collateral: The European Lenders' Experience was commissioned by the Risk Management Association (RMA) and forms part of its submission to US regulators.
The report highlights the overwhelming reliance on cash collateral by US domiciled institutions. This contrasts heavily with other countries, such as the UK, where cash accounts for only 21 per cent of collateral and Canada, which has seen reliance on cash almost halve to 20 per cent over a three year period.
"With investor protection at the forefront, US regulators such as the SEC (mutual funds) and the Department of Labor (pension funds) may wish to reflect on positive European experiences to ascertain the potential benefits of adopting international collateral practices," added Faulkner. "Cash remains an important component of collateral, but we believe it should form part of a balanced portfolio."
The debate of cash over equity will be discussed at the Securities Financing Forum on 26 May in New York.
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