Page 10 - ISLA_SLReport_Sep2019
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Securities being made available by institutional investors   Dollars driving the demand to borrow US Treasuries,
                                                                                                          Fig 2 - Global Securities Lending Market
      for lending showed a notable increase from €16.6 to   and the financing of long equity positions via collateral
      €19.6 trillion, an increase of some 18% over the period.   upgrade trades.
      Whilst we saw a 15% increase in the Dow Jones Industrial                                                €20M                                                                   €2.2M
      Index over the period, accounting in part for the increase   Further review of the composition of trading books
      in equity valuations, this is perhaps only part of the story.   and the use of cash or other securities (non-cash) as
                                                  collateral, highlights how institutions actively and at times
      Government  bonds  being  made  available  for  lending   aggressively manage to various regulatory or market
      increased by over 13% to €2.8 trillion. There is clear   constraints. As highlighted in Fig 3, we saw the typical
      evidence of increased bond issuance more broadly as   relationship between cash and non-cash collateral as the   Total Lendable Assets (M)                                        On-Loan Balance (M)
      issuers look to take advantage of record low yields. In   market moved to adjust balance sheet and exposures
      addition, new or previously un-lent assets have entered   ahead  of  the  30  June  reporting  checkpoint.  Loans
      programmes, as investors look to enhance revenue in the   collateralised with cash collateral were either being
      low or even negative yield environment.     returned or recalled ahead of non-cash loans.

      Set against a backdrop of broadly flat equity supply and   The reasons behind this trend are now well understood,
                                                                                                              €16M                                                                   €2M
      a notable increase in the availability of government bonds   with banks often preferring to keep HQLA regulatory driven
                                                                                                                     Jan 2019   Feb 2019   Mar 2019  April 2019  May 2019   Jun 2019
      within the system, the ISLA Global Securities Lending   non-cash trades open over the reporting date, preferring
      Aggregate (Fig 1*) remained broadly unchanged at circa   to scale back equity positions. There is also a preference                                                     Source: IHS Markit
      €2.2 trillion compared to the 31 December 2018.   to return cash collateralised loans to avoid having to
                                                  engage in reinvestment markets, at a point when liquidity   Europe. In the short term, the end of QE here in Europe   The mobilisation and movement of collateral is one of
      As we have seen from previous reports, banks and   and investment opportunities could be limited. Typically,   appears to have released bond liquidity back into the   the most strategically important parts of our market in
      other  prudentially  regulated  firms  appear  to  be  better   borrowers want to maintain regulatory driven HQLA   market, reducing the immediate demand to borrow   the  context  of  the  Capital  Markets  Union  (CMU)  and
      prepared to hit various regulatory reporting hurdles over   trades over the year end, as part of an active balance   HQLA. However, this may only be a temporary factor as   other market facing initiatives. As the buy-side looks to
      key reporting dates. Increasingly, as regulators demand   sheet management strategy where the LCR is the primary    the market awaits the impact of waves four and five of   implement these new mandatory obligations, the role of
      average reporting or daily compliance, quarter or year   binding constraint.                       the uncleared margin rules for derivative transactions    securities lending as a conduit to move liquidity around
      end pressure will disappear. However, we did see some                                              in 2020.                                    the markets will be key to their successful implementation.
      interesting volatility in terms of trading volumes during   These trades are in turn often collateralised with other
      the  period,  and  in  particularly  the  final  days  of  the   securities which are themselves balance sheet efficient   Fig 3 - Global Securities On-Loan - Cash Versus Non-Cash
      quarter (Fig 2).                            if pledged as collateral as part of a term HQLA trade
                                                  structure. As we have already noted, there was something
                                                                                                             €900k                                                                   €1,500k
      After some seasonality in trading volumes in the early   of  an  anomaly  in  fixed  income  markets  just  prior  to
      months of the year, we saw general deleveraging   the half year that saw increased levels of borrowing
      across the market over the six month period, with less   of government bonds. As Fig 3 highlights, the market
      need  for  financing  and  consequently  less  pressure   perhaps off the back of a sudden change of sentiment or
      on yields/fees. This stemmed from actions taken over   trading opportunity, seemed equally prepared to use both
      the 2018 year end and into 2019, where hedge funds   types of collateral over the turn in this particular case.
      took off risk positions. Furthermore, the fact that banks                                              On-Loan Balance vs Cash (M)                                                On-Loan Balance vs Non-Cash (M)
      are generally well positioned for Liquidity Coverage   Although we saw small falls in both the absolute level
      Ratio (LCR) compliance, means less need to reverse   of government bond lending as well as the percentage
      in HQLA into the reporting date. The sudden spike   (45% to 43%) over the period, the intrinsic link between
      in  on-loan  balances  in  the  final  days  of  the  half  year,   securities lending markets and the broader capital
      was almost exclusively related to government bonds.   markets  it still clear. Some of the apparent fall in the
      Although the reasons behind this sudden increase will   demand to borrow government bonds probably relates   €600k                                                             €1,200k
      be considered further in a subsequent section, this   to either firms better managing their own balance sheets   Jan 2019  Feb 2019  Mar 2019  April 2019  May 2019   Jun 2019
      is most likely related to a combination of reasons; the   and inventories thereby reducing external demand or
      liquidity premium often associated with holding US   the rolling impact of the end of the ECB’s QE program in                                                           Source: IHS Markit

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