Collateral liquidity drought driving buy-side to CCPs, survey reveals
27 June 2017 New York
Image: Shutterstock
Securities lending and repo central clearing models are becoming more attractive to buy-side firms due to concerns over scarcity of short-term liquidity, according to an industry survey by BNY Mellon and PwC.
A joint report on the results explained that the buy-side community was “grappling to adjust to its new collateralised trading obligations as well as striving to secure access to sustainable sources of funding and liquidity”.
The survey received responses from 120 global firms during the first quarter of 2017.
The report also highlighted that the “classic concerns” associated with use of CCPs still endure.
Survey respondents cited the lack of appetite for posting margin and/or contributing to default funds; fellow customer risk; issued with access to collateral in the event of the member or CCP default; and an unequal playing field due to potential CCP participation by only a specific type of buy-side firm as some of the factors holding back wider buy-side use of central clearing.
At the same time, over 90 percent of participants noted a direct impact on their collateral obligations due to regulations such as over-the-counter uncleared margin requirements.
Of the asset managers surveyed, 71 percent said they are counting on consolidating their existing dealer relationships to maintain access to liquidity. Meanwhile, just under half also intend to expand the number of relationships they have with bank counterparties.
The report also noted that larger and well-resourced buy-side institutions have implemented, or are in the process of implementing, sophisticated collateral management initiatives, such as generating yield on collateral through securities lending.
These buy-side firms are also changing their models to view collateral as an asset class and also utilising collateral transformation.
Pension funds and insurance companies, which are the lifeblood of the stock loan industry, generally indicated a willingness to use new sources of liquidity, but 93 percent of respondents stated that an ongoing credit indemnification service provided by agents was a “critical consideration”.
James Slater, Managing Director , BNY Mellon Markets, said: “The funding environment is experiencing a dislocation due to the pull of two opposing forces - the introduction of collateralized trading obligations for the buy-side coinciding with increased capital and liquidity requirements on the dealers traditionally called upon to provide such liquidity to clients.”
“There is a structural shift in the market taking place which is impacting all the major players.”
Michelle Neal added: “Respondents also believe that the continuing balance sheet pressure on sell-side institutions has constrained the ability of many traditional bank market makers to adequately service their liquidity requirements.”
“As a result, many executives are seeking new relationships to backstop their existing liquidity providers, exploring trading with non-traditional counterparties and investigating participation on peer-to-peer liquidity platforms. There is a meaningful shift towards viewing the investment and trading process as much more than simply a series of transactions and this underscores why we’re reinventing our own business.”
“The focus in this new environment is to provide access to more and different relationships to better meet the liquidity demands of our clients.”
A joint report on the results explained that the buy-side community was “grappling to adjust to its new collateralised trading obligations as well as striving to secure access to sustainable sources of funding and liquidity”.
The survey received responses from 120 global firms during the first quarter of 2017.
The report also highlighted that the “classic concerns” associated with use of CCPs still endure.
Survey respondents cited the lack of appetite for posting margin and/or contributing to default funds; fellow customer risk; issued with access to collateral in the event of the member or CCP default; and an unequal playing field due to potential CCP participation by only a specific type of buy-side firm as some of the factors holding back wider buy-side use of central clearing.
At the same time, over 90 percent of participants noted a direct impact on their collateral obligations due to regulations such as over-the-counter uncleared margin requirements.
Of the asset managers surveyed, 71 percent said they are counting on consolidating their existing dealer relationships to maintain access to liquidity. Meanwhile, just under half also intend to expand the number of relationships they have with bank counterparties.
The report also noted that larger and well-resourced buy-side institutions have implemented, or are in the process of implementing, sophisticated collateral management initiatives, such as generating yield on collateral through securities lending.
These buy-side firms are also changing their models to view collateral as an asset class and also utilising collateral transformation.
Pension funds and insurance companies, which are the lifeblood of the stock loan industry, generally indicated a willingness to use new sources of liquidity, but 93 percent of respondents stated that an ongoing credit indemnification service provided by agents was a “critical consideration”.
James Slater, Managing Director , BNY Mellon Markets, said: “The funding environment is experiencing a dislocation due to the pull of two opposing forces - the introduction of collateralized trading obligations for the buy-side coinciding with increased capital and liquidity requirements on the dealers traditionally called upon to provide such liquidity to clients.”
“There is a structural shift in the market taking place which is impacting all the major players.”
Michelle Neal added: “Respondents also believe that the continuing balance sheet pressure on sell-side institutions has constrained the ability of many traditional bank market makers to adequately service their liquidity requirements.”
“As a result, many executives are seeking new relationships to backstop their existing liquidity providers, exploring trading with non-traditional counterparties and investigating participation on peer-to-peer liquidity platforms. There is a meaningful shift towards viewing the investment and trading process as much more than simply a series of transactions and this underscores why we’re reinventing our own business.”
“The focus in this new environment is to provide access to more and different relationships to better meet the liquidity demands of our clients.”
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