Page 10 - ISLA SL Report March 2019
P. 10

been an orderly, well-managed process with the data   to non-cash collateral as we saw the latter rise into the
                                                                                                          Fig 2 - Global Securities Lending Market
      suggesting that certain trades or asset classes were   year-end (see Fig3 ).
      given a degree of priority in terms of maintaining them
      over the year-end.                          Other  drivers  behind  the  trading  behavior  in  the  final   €19M                                                              €2.3M
                                                  weeks of the year, included the absence of any material
      Fig  2  highlights  the  clear  fall-off  in  on-loan  balances   reinvestment opportunities. Cash collateral received
      running into the year end, falling 4% in the final month   by lenders therefore pushed many of them to recall
      of the year. Further review of the composition of trading   securities simply to avoid unnecessary investment risks
      books and the use of cash or other securities (non-cash)   over the year-end.
      as collateral, highlights how institutions actively and                                                Group Lendable (M)                                                         Group Total Balance (M)
      at times aggressively manage to various regulatory or   Another factor this year was that following the return of
      market constraints.                         volatility to equity markets, AIMs actively deleveraged
                                                  and de-risked in the period prior to the year-end. This
      As highlighted, there was once again a clear preference   added to the fall in equity on-loan balances.
      in  the  final  quarter  of  the  year  to  either  recall  or
      return  those  trades  that  are  typically  collateralized   More broadly, government bonds represented over 45%
                                                                                                              €16M                                                                   €2M
      with cash collateral.                       of all securities on-loan globally, highlighting once again
                                                                                                                     Jul 2018   Aug 2018  Sept 2018   Oct 2018   Nov 2018  Dec 2018
                                                  the intrinsic link between securities lending markets and
      Typically, borrowers want to maintain regulatory driven   the broader capital markets.                                                                                  Source: IHS Markit
      HQLA trades over the year-end as part of an active
      balance sheet management strategy, where the Liquidity   Although we did see a fall in on-loan balances ahead of   as  QE  disappears  from  the  monetary  landscape  and   to  consider  the  implications  of  these  changes  to  the
      Coverage Ratio (LCR) is the primary binding constraint.   the year-end, this is more likely to have been associated   securities previously bought by central banks and   management and implementation of monetary policy.
      These trades are in turn often collateralized  with other   with the  simple  fact that  many institutions are  LCR   recycled into the market via lending programmes
      securities which are themselves balance sheet efficient   compliant and the absolute growth in HQLA trading   disappear over time.            As  the  reliance  on  effective  central  bank  liquidity  falls,
      if pledged as collateral  as part of a term HQLA trade   structures has reached something of a ceiling. Also,                                  the role of institutional investors in providing broader
      structure. In fact, there is some evidence that in the final   the mobilization of these HQLA assets within securities   As the broader capital markets digest the impacts of   market liquidity is key for the future. This will become
      weeks of the year, borrowers actively switched from cash   lending programmes will be increasingly more important   the end of QE, the securities lending markets also need   of greater importance with the arrival of uncleared

        Fig 1 - ISLA Securities Lending Aggregate                                                         Fig 3 - Global Securities On Loan - Cash Versus Non-Cash

           €2.5T                                                                                             €800k                                                                   €1,500k
                                                                                                             Group Balance vs Cash (M)                                                  Group Balance vs Non-Cash (M)


             €0                                                                                              €600k                                                                   €1,300k
                Jun 2014  Dec 2014  Jun 2015  Dec 2015  Jun 2016  Dec 2016  Jun 2017  Dec 2017  Jun 2018  Dec 2018   Jul 2018   Aug 2018  Sept 2018   Oct 2018   Nov 2018  Dec 2018
                                                                              Source: ISLA                                                                                    Source: IHS Markit

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