Global Variations in Securities Lending Collateral

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Collateral and collateral requirements vary broadly across the globe. In the US and UK regulators are currently reviewing existing legislation involving collateral and collateral levels. Across the globe, securities lending and borrowing collateral is dispersed among a wide range of assets.

Securities Lending and Borrowing Collateral

Most securities lending and borrowing agreements require collateral of value equal to or greater than the loaned securities plus an agreed upon margin which provides security against added risks. Collateral can take the form of cash or non-cash securities. In the case of non-cash, collateral can include securities such as equities, government bonds, convertible bonds, corporate bonds, and more.

UK Securities Lending and Borrowing

Securities lending and borrowing is one aspect under consideration in the UK Prudential Regulation Authority’s (PRA) current consultation which involves its recent “Pillar 2 Liquidity – CP13/17” publication. Rules currently being researched and debated include the specifications for margin levels on securities lending and borrowing. The PRA is currently of the position that securities lending and borrowing margins should be based on historical levels with an added stress uplift. The stress uplift is currently the focus of debates and is currently being identified as subject to supervisory judgement. Supervisory judgement is expected to be based on a number of factors which consider intraday liquidity management, sophistication of corporate payment and settlement systems, and the credit quality of the collateral assets.

US Securities Lending and Borrowing

In the US, the Securities and Exchange Commission (SEC) has been reporting ongoing debates on the use of equity for collateral in securities lending and borrowing. The US has one of the world’s largest securities lending and borrowing markets with approximately $6.4 trillion in lendable assets. However, unlike other markets, the use of equity as collateral has not previously been an option. This is being debated in SEC rule 15c3-3. Currently the most common forms of collateral include cash and US Treasuries or Ginnie Mae agency bonds. An approval of equity as collateral for securities lending and borrowing in the US would significantly change the market landscape.

Securities Lending and Borrowing Collateral Dispersion Globally

The International Securities Lending Association (ISLA) provides details on the market landscape and percentages of collateral being used worldwide. According to ISLA the value of on loan balances globally through the first half of 2017 was EUR1.8 trillion and the value of lendable assets globally was EUR15 trillion.

ISLA supports the focus on high levels of cash collateral concentrated in the US also reporting that in the UK over 90% of government bond securities lending was transacted against non-cash collateral. The Association regularly provides a breakdown of non-cash collateral used in the UK with its most recent reporting showing equities as the greatest percentage of UK collateral at 49% followed by government bonds at 39%.

In terms of global lendable supply for securities lending, mutual funds and pension funds top the list with a combined 65% of the global lendable supply. ISLA also reports on the breakdown of global on loan assets reporting that banks and broker dealers top this list with 29% of the market share followed by 19% from pension plans, 14% from mutual funds, 11% from sovereign wealth, 5% from insurance, and only 1% from foundations and endowments.

Variations in UK versus US Securities Lending and Borrowing

The US and UK report some of the world’s highest volumes in securities lending and borrowing however the two markets have significantly different rules and regulations. The use of equity as collateral for securities lending has historically been an option in the UK whereas the US has focused on tighter restrictions. With one of the world’s largest securities lending markets, reporting over $6 trillion in lendable assets, broader acceptance of collateral by the US would significantly alter its market landscape and significantly broaden its lending capabilities throughout the world. Internationally a trend toward increased returns for lenders willing to accept broader forms of collateral for securities lending transactions has been occurring throughout the world and could help to influence a broadening acceptance of US securities financing collateral in the near-term.