Making financial markets flow
16 June 2015
Clearstream’s Alexandre Roques talks about the importance of securities lending to the eurosystem and the benefits of fails and strategic lending services to central banks and to the markets in general
Image: Shutterstock
When the European Central Bank (ECB) announced that it would be purchasing €60 billion of securities per month as part of its Public Sector Purchase Programme (PSPP) in January 2015, there were concerns from parts of the market that this would do more than just provoke fiscal stimulus. While the intention of the ECB was to push more cash to market participants in the hope that they would start hunting assets with a higher return, many dealers and securities houses were concerned that the removal of valuable securities supply would potentially dislocate settlement processes as a consequence.
The good news is that their fears have been largely unfounded to date. In April 2015, the ECB announced that each of the eurosystem’s central banks would look to start lending securities obtained through the PSPP back into the market. This has already been evidenced by the fact that both the Banca d’Italia and the Bundesbank are using Clearstream as custodian and distribution agent for these assets. When you read the ECB’s statement, they advised that a number of different distribution options would be available for use in the market, from automatic fails lending products such as the Automated Securities Lending (ASL) programme offered by Clearstream to bilateral and other agency lending facilities.
Fails lending programmes seemed an obvious choice and have been important to the historical development of the securities lending market. They are offered by international central securities depositories such as Clearstream and underpin wholesale settlement processes. Banks have always accessed fails lending programmes to complement their strategic lending relationships and therefore maximise their access to all types of inventory. Moreover, fails borrowing programmes are simple to use.
In Clearstream’s ASL programme, the settlement platform automatically identifies those bilateral securities deliveries that are unsettled because of failing incoming receipts. It then looks to automatically source sufficient securities from its lending clients to cover these deliveries at the earliest opportunity on value date. Any incoming receipts that subsequently settle are automatically used to close out open loans without any borrower intervention. This makes the service both operationally light and also cost conscious, with fails lending facilities traditionally being free to access if borrows are collapsed on the same day.
Loan positions that remain open at the end of each day are charged in line with rates that are reviewed on a monthly basis. The price of the service has historically been aligned with money market rates to allow borrowers to re-invest the cash received from their bilateral deliveries into the money markets, thereby offsetting their costs. However, in a low or even negative interest rate environment, it is actually the lender that now earns a premium for its participation as fails lending facilities guarantee lenders a minimum fee for their loans.
While yield is not the primary incentive for central banks, their ability to lend assets back into the securities markets is critical and something which custodians and lending agents alike encourage. A large number of central banks all over the globe already use Clearstream as their custodian and the opportunity to complement fails lending with strategic lending opportunities was a common-sense decision. In fact, it was for this reason that Clearstream launched its own strategic lending programme, ASLplus, eight years ago and the benefits for all parties are clear.
On the one side, borrowers get the opportunity to access high-quality portfolios for both short-term fails coverage as well as for longer-term borrowing needs. On the opposite side, lenders can generate increased revenues from longer-term lending activities as well as offset the custody costs associated with the portfolio—and all of this with no increase in operational administration or overhead.
In the case of the redistribution of the PSPP assets, combining strategic lending and fails lending services certainly seems to make sense. Under the terms of the PSPP, each of the eurosystem’s central banks has the ability to determine the individual terms at which they would lend their PSPP holdings. This includes decision-making around collateral and counterparty eligibility criteria as well as pricing, term and haircut, although it seems likely that the criteria may converge to a harmonised standard in the longer term. The large majority of strategic lenders, including Clearstream, have the ability to cater for customisable options and this gives borrowers different options as to how they wish to access the supply.
However, what is compelling about Clearstream’s offering is that it offers both fails and strategic lending as a combination. Going forward, when you add Eurex Clearing’s Lending Central Counterparty into the mix, it only increases its attractiveness even further. To complement its flagship ASL and ASLplus products, Clearstream will be launching two agency lending services in 2015. In addition to a classical agency lending product, it will also be offering an agency lending service that uses Eurex Clearing as the central counterparty and Eurex Repo as the third-party flow provider. In both cases, Clearstream will manage the collateral on behalf of both the lender and the borrower using its triparty collateral management services.
As a starting point, however, the focus of the eurosystem has simply been to ensure that liquidity could easily flow back into the markets and specifically to the market makers. The fact that the large majority of this segment already use both the ASL and ASLplus programmes presents a significant time-to-market advantage for central banks. Moreover, the fact that both programmes use a common securities lending and settlement infrastructure has meant that the assets can be lent appropriately in accordance with market demand.
From an asset safety perspective, Clearstream has always worked with central banks across the globe to ensure that we can help to create robust market solutions. In a changing regulatory climate, access to liquidity remains of paramount importance and whether within the context of securities lending or the wider world of collateral management, Clearstream will continue to help central banks to make financial markets flow.
The good news is that their fears have been largely unfounded to date. In April 2015, the ECB announced that each of the eurosystem’s central banks would look to start lending securities obtained through the PSPP back into the market. This has already been evidenced by the fact that both the Banca d’Italia and the Bundesbank are using Clearstream as custodian and distribution agent for these assets. When you read the ECB’s statement, they advised that a number of different distribution options would be available for use in the market, from automatic fails lending products such as the Automated Securities Lending (ASL) programme offered by Clearstream to bilateral and other agency lending facilities.
Fails lending programmes seemed an obvious choice and have been important to the historical development of the securities lending market. They are offered by international central securities depositories such as Clearstream and underpin wholesale settlement processes. Banks have always accessed fails lending programmes to complement their strategic lending relationships and therefore maximise their access to all types of inventory. Moreover, fails borrowing programmes are simple to use.
In Clearstream’s ASL programme, the settlement platform automatically identifies those bilateral securities deliveries that are unsettled because of failing incoming receipts. It then looks to automatically source sufficient securities from its lending clients to cover these deliveries at the earliest opportunity on value date. Any incoming receipts that subsequently settle are automatically used to close out open loans without any borrower intervention. This makes the service both operationally light and also cost conscious, with fails lending facilities traditionally being free to access if borrows are collapsed on the same day.
Loan positions that remain open at the end of each day are charged in line with rates that are reviewed on a monthly basis. The price of the service has historically been aligned with money market rates to allow borrowers to re-invest the cash received from their bilateral deliveries into the money markets, thereby offsetting their costs. However, in a low or even negative interest rate environment, it is actually the lender that now earns a premium for its participation as fails lending facilities guarantee lenders a minimum fee for their loans.
While yield is not the primary incentive for central banks, their ability to lend assets back into the securities markets is critical and something which custodians and lending agents alike encourage. A large number of central banks all over the globe already use Clearstream as their custodian and the opportunity to complement fails lending with strategic lending opportunities was a common-sense decision. In fact, it was for this reason that Clearstream launched its own strategic lending programme, ASLplus, eight years ago and the benefits for all parties are clear.
On the one side, borrowers get the opportunity to access high-quality portfolios for both short-term fails coverage as well as for longer-term borrowing needs. On the opposite side, lenders can generate increased revenues from longer-term lending activities as well as offset the custody costs associated with the portfolio—and all of this with no increase in operational administration or overhead.
In the case of the redistribution of the PSPP assets, combining strategic lending and fails lending services certainly seems to make sense. Under the terms of the PSPP, each of the eurosystem’s central banks has the ability to determine the individual terms at which they would lend their PSPP holdings. This includes decision-making around collateral and counterparty eligibility criteria as well as pricing, term and haircut, although it seems likely that the criteria may converge to a harmonised standard in the longer term. The large majority of strategic lenders, including Clearstream, have the ability to cater for customisable options and this gives borrowers different options as to how they wish to access the supply.
However, what is compelling about Clearstream’s offering is that it offers both fails and strategic lending as a combination. Going forward, when you add Eurex Clearing’s Lending Central Counterparty into the mix, it only increases its attractiveness even further. To complement its flagship ASL and ASLplus products, Clearstream will be launching two agency lending services in 2015. In addition to a classical agency lending product, it will also be offering an agency lending service that uses Eurex Clearing as the central counterparty and Eurex Repo as the third-party flow provider. In both cases, Clearstream will manage the collateral on behalf of both the lender and the borrower using its triparty collateral management services.
As a starting point, however, the focus of the eurosystem has simply been to ensure that liquidity could easily flow back into the markets and specifically to the market makers. The fact that the large majority of this segment already use both the ASL and ASLplus programmes presents a significant time-to-market advantage for central banks. Moreover, the fact that both programmes use a common securities lending and settlement infrastructure has meant that the assets can be lent appropriately in accordance with market demand.
From an asset safety perspective, Clearstream has always worked with central banks across the globe to ensure that we can help to create robust market solutions. In a changing regulatory climate, access to liquidity remains of paramount importance and whether within the context of securities lending or the wider world of collateral management, Clearstream will continue to help central banks to make financial markets flow.
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