Unlocking liquidity
10 June 2014
Regulation is creating new opportunities for securities lenders
Image: Shutterstock
As new regulations such as the European Market Infrastructure Regulation (EMIR) and Basel III force financial institutions and intermediaries to look more closely at how and where they manage their collateral, questions continue to be raised around whether a ‘collateral crunch’ will start to materialise in 2014, or whether the global financial infrastructure is able to support the fluidity of collateral that markets and participants desire.
Securities lending activities have traditionally played a significant role in this process and new capital and liquidity requirements are encouraging institutions to look at the ways that they access inventory and collateral in a different light.
“It has been a very busy year for us so far,” comments Alexandre Roques, head of ASLplus sales at Clearstream Banking.
“Despite spreads continuing to tighten across the board, we have seen a significant increase in lent balances during the first half of 2014. Demand for corporate bonds, in particular for euro-denominated issues, and emerging market debt continues to increase but we have seen the biggest changes resulting from the increasing demand for AAA- and AA-rated government bonds, in particular German bunds.”
Clearstream feels that this is being driven more and more by the need for firms to satiate regulatory concerns as borrowers prepare themselves for the roll-out of the Basel III framework, and in particular adherence to the liquidity coverage ratio (LCR) that will be introduced in 2015.
The LCR has been designed by regulators as a measure of financial stability in times of stress. Specifically, it represents the value of unencumbered high quality liquid assets (HQLA) that a financial institution needs to have access to cover its total net cash outflows for a prolonged stress period of at least 30 days.
“In broad terms, assets that qualify as HQLA need to be liquid, central bank eligible and easily monetised in times of stress,” says Roques.
The requirements stipulate that at least 60 percent of HQLA should be met using the highest quality ‘Level 1’ assets, which includes cash, and specific high-grade sovereign debt, and no more than 40 percent of ‘Level 2’ assets, which includes specific lower-grade liquid grade sovereign debt, certain corporate and covered bonds, as well as some equities.
“As a large number of AAA and AA government bonds have generally fallen under the Level 1 categorisation, access to a stable and reliable source of top quality HQLA, in particular German bunds, will be essential for any financial institutions that want to manage their LCR efficiently. This is precisely an area of the market that Clearstream’s Global Liquidity Hub and in particular its ASLplus product has been designed to support,” says Roques.
“As we represent the central securities depository in Germany and the international central securities depository in Luxembourg, we have a large natural franchise in European government bonds and Bunds in particular and we are strategically best placed to mobilize them for collateral transformation purposes via our low-risk securities lending products,” comments Roques.
Clearstream’s ASLplus product was launched in 2006 as a complementary service to its existing ASL fails borrowing service, and was designed to unlock stable pools of high-quality assets that it holds as custodian for clients that are happy to lend them. After eight years of development and distribution, independent vendor league tables now rank Clearstream as one of the largest and most important lenders of bunds in the world.
Roques adds: “As an infrastructure provider, it is important for us to ensure that we can provide efficient solutions to facilitate the distribution of liquidity and collateral where it is needed most. We have access to a plentiful supply of bunds as well as other high-grade ‘Level 1’ qualifying assets, and the fact that our balances are generally stable in nature creates an attractive value proposition for our clients. It is the smooth reliable, nature of our business that makes us a reliable and trustworthy source of key liquidity in the current environment.”
In fact, trust has always been an attribute on which Clearstream places great emphasis when developing its securities financing products, and also its relationships with its lenders and borrowers.
“The combination of a secure legal set up where Clearstream acts as sole borrower to its lenders and as sole lender to specific approved borrowers is the starting point. We use the industry standard Global Master Securities Lending Agreement together with our collateral management agreement under Luxembourg law and only accept specific liquid collateral with full title transfer. This makes us attractive to risk-averse lenders,” confirms Roques.
“We have also optimised our distribution through a combination of proprietary desks in London and in Singapore as well as key distribution partners. This gives us the opportunity to negotiate the best possible rates on behalf of our lenders. In addition, our award-winning collateral management products have been used by the wider financial community for over 20 years and allow borrowers to streamline their collateral processes with us accordingly.”
The demand for high-quality assets is likely to increase unabated in particular with the onset of the mandatory clearing requirements in the OTC derivative space later this year.
Roques says: “Challenges remain and easing measures enforced by central banks over the past few years have put substantial pressure on yields. Capital usage needs be managed efficiently and banks will need to look at the ways that they can manage their LCR ratio most effectively. Central clearing opens new doors but it is a firm’s ability to mobilise its long balances, whether these are at a local or group level, and to unlock any liquidity that might be used to fulfill their regulatory obligation without impacting revenue, that will be critical.”
“Through our Global Liquidity Hub initiatives not only in Europe but also the partnerships that we have developed through the Liquidity Alliance, we strive to ensure that the market place has the right tools as its disposal and the increasing demand for our supply and the use of our collateral management products is an encouraging sign that our vision is the right one.”
Securities lending activities have traditionally played a significant role in this process and new capital and liquidity requirements are encouraging institutions to look at the ways that they access inventory and collateral in a different light.
“It has been a very busy year for us so far,” comments Alexandre Roques, head of ASLplus sales at Clearstream Banking.
“Despite spreads continuing to tighten across the board, we have seen a significant increase in lent balances during the first half of 2014. Demand for corporate bonds, in particular for euro-denominated issues, and emerging market debt continues to increase but we have seen the biggest changes resulting from the increasing demand for AAA- and AA-rated government bonds, in particular German bunds.”
Clearstream feels that this is being driven more and more by the need for firms to satiate regulatory concerns as borrowers prepare themselves for the roll-out of the Basel III framework, and in particular adherence to the liquidity coverage ratio (LCR) that will be introduced in 2015.
The LCR has been designed by regulators as a measure of financial stability in times of stress. Specifically, it represents the value of unencumbered high quality liquid assets (HQLA) that a financial institution needs to have access to cover its total net cash outflows for a prolonged stress period of at least 30 days.
“In broad terms, assets that qualify as HQLA need to be liquid, central bank eligible and easily monetised in times of stress,” says Roques.
The requirements stipulate that at least 60 percent of HQLA should be met using the highest quality ‘Level 1’ assets, which includes cash, and specific high-grade sovereign debt, and no more than 40 percent of ‘Level 2’ assets, which includes specific lower-grade liquid grade sovereign debt, certain corporate and covered bonds, as well as some equities.
“As a large number of AAA and AA government bonds have generally fallen under the Level 1 categorisation, access to a stable and reliable source of top quality HQLA, in particular German bunds, will be essential for any financial institutions that want to manage their LCR efficiently. This is precisely an area of the market that Clearstream’s Global Liquidity Hub and in particular its ASLplus product has been designed to support,” says Roques.
“As we represent the central securities depository in Germany and the international central securities depository in Luxembourg, we have a large natural franchise in European government bonds and Bunds in particular and we are strategically best placed to mobilize them for collateral transformation purposes via our low-risk securities lending products,” comments Roques.
Clearstream’s ASLplus product was launched in 2006 as a complementary service to its existing ASL fails borrowing service, and was designed to unlock stable pools of high-quality assets that it holds as custodian for clients that are happy to lend them. After eight years of development and distribution, independent vendor league tables now rank Clearstream as one of the largest and most important lenders of bunds in the world.
Roques adds: “As an infrastructure provider, it is important for us to ensure that we can provide efficient solutions to facilitate the distribution of liquidity and collateral where it is needed most. We have access to a plentiful supply of bunds as well as other high-grade ‘Level 1’ qualifying assets, and the fact that our balances are generally stable in nature creates an attractive value proposition for our clients. It is the smooth reliable, nature of our business that makes us a reliable and trustworthy source of key liquidity in the current environment.”
In fact, trust has always been an attribute on which Clearstream places great emphasis when developing its securities financing products, and also its relationships with its lenders and borrowers.
“The combination of a secure legal set up where Clearstream acts as sole borrower to its lenders and as sole lender to specific approved borrowers is the starting point. We use the industry standard Global Master Securities Lending Agreement together with our collateral management agreement under Luxembourg law and only accept specific liquid collateral with full title transfer. This makes us attractive to risk-averse lenders,” confirms Roques.
“We have also optimised our distribution through a combination of proprietary desks in London and in Singapore as well as key distribution partners. This gives us the opportunity to negotiate the best possible rates on behalf of our lenders. In addition, our award-winning collateral management products have been used by the wider financial community for over 20 years and allow borrowers to streamline their collateral processes with us accordingly.”
The demand for high-quality assets is likely to increase unabated in particular with the onset of the mandatory clearing requirements in the OTC derivative space later this year.
Roques says: “Challenges remain and easing measures enforced by central banks over the past few years have put substantial pressure on yields. Capital usage needs be managed efficiently and banks will need to look at the ways that they can manage their LCR ratio most effectively. Central clearing opens new doors but it is a firm’s ability to mobilise its long balances, whether these are at a local or group level, and to unlock any liquidity that might be used to fulfill their regulatory obligation without impacting revenue, that will be critical.”
“Through our Global Liquidity Hub initiatives not only in Europe but also the partnerships that we have developed through the Liquidity Alliance, we strive to ensure that the market place has the right tools as its disposal and the increasing demand for our supply and the use of our collateral management products is an encouraging sign that our vision is the right one.”
NO FEE, NO RISK
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
