Facebook logo
Facebook logo
Facebook logo
Facebook logo

Latest Headlines

Securities Lending Times home | UK collateral upgrade trade eyed by FSA ← You are here

[close]
Latest News
Vanguard to open ETFs to sec lending
31 August 2016 | Pennsylvania
Vanguard Asset Management is preparing to allow select exchange-traded funds to engage in securities lending transactions as an additional revenue source... Read more

FSB: members must improve OTC margin compliance
31 August 2016 | Basel
Around half of Financial Stability Board member jurisdictions need to “urgently take steps” to get back on track with their implementation of over-the-counter margin requirements, according to the FSB... Read more

For more news visit our news section

Upcoming events
Cash & Liquidity Optimization USA
Date: 13-14 September 2016
Location: New York City
Find out more

IMN European Beneficial Owners Securities Lending Conference
Date: 22-23 September 2016
Location: London, UK
Find out more

For more events visit our event section
Industry recruitment
Business Analyst
Recruiter: Alexander Ash
Location: Midlands
Find out more

Senior Sales Executive
Recruiter: CloudMargin
Location: New York
Find out more

For more jobs visit our recruitment section
Securities Lending Times
View the latest issues online now

Sister publications
Asset Servicing Times
www.assetservicingtimes.com

Captive Insurance Times
www.captiveinsurancetimes.com

Real Estate Investment Times
www.realestateinvestmenttimes.com

Media pack [download]
Ad specs [download]
Latest features
Under pressure: financial services turns the screw
Feature: The BCBS has been taken to task over its latest leverage ratio framework proposal, with commentators claiming it may unbalance global markets and damage the business model of clearinghouses Read more

South Africa
Country profile: South Africa’s securities lending industry is on the verge of embracing a modern T+3 settlement cycle that could boost the country’s market Read more

Etienne Ravex :: Murex
Interview: Technology providers need to be more than one-trick ponies to service securities finance participants, as Etienne Ravex of Murex explains Read more

For more features visit our features section
Latest news
More news
IPPro default image
UK collateral upgrade trade eyed by FSA
17 October 2011 | London | Reporter: Anna Reitman
The Financial Services Authority (FSA) is considering enacting guidelines on the collateral upgrade trade after increasing activity has caused concerns over macroprudential risk.

A recent FT article claimed that sources within the financial services industry reported blocked “liquidity swap” transactions – which may include stock (securities) lending, repo transactions or sale plus total return swap - however, an FSA spokesman denied being aware of any blocked transactions since actions on guidance are still being put in place and the UK regulator continues to consult the industry on proposals, at the same time it is the FSA’s practice to not comment on supervisory actions with firms.

In stock lending, gilts, or UK government bonds, are lent by an insurer for a significant period in return for a fee and collateral. Legal ownership of the gilt passes to the borrowing bank counterparty - in the event of the bank counterparty defaulting, the insurer has recourse to the collateral.

“If structured and operated correctly, valuation, margining and over-collateralisation should protect the insurer against loss in the event of a ‘fire-sale’ of the collateral. To the extent there is insufficient collateral the insurer will have an unsecured claim against the bank counterparty,” the FSA writes in its guidance consultation.

The main areas of concern for the FSA are in the mechanics of risk management within organisations participating in liquidity transformation – seemingly trading up asset-backed securities (ABS) as this structured product is mentioned in the guidance consultation - and what the potential impact might be on the wider economy if the practice becomes more common.

This is quite likely to become a reality, as most industry experts across the banking, insurance and pension fund industries are expecting the collateral upgrade trade to become a major driver of securities lending activity since global regulations pushing OTC transactions on exchange will substantially increase the demand for high quality collateral to post to a CCP against derivatives trades.

Irving Henry, director of Prudential Capital and Risk at the British Bankers’ Association (BBA), says that the FSA proposals are in their infancy but that the regulator needs to spend more time looking at a wider variety of transactions and become more comfortable with the way that different market participants approach the practice.

“There was very much a feeling [during the consultation] that insurance companies need to be protected from banks and whether the governance of risk at the insurance companies was up to scratch,” he says. “But [insurance companies] felt better able to hang on to these types of [riskier] assets because they tend to be long investors and they are trying to get some additional yield which they are not able to do holding a shedload of gilts.”

Gilts fit better with banks which need the immediate liquidity, while insurance companies feel able to sit out stresses by holding onto the assets for a longer period of time, he adds.

Another sticking point for the FSA for liquidity swaps was on the issue of intragroup transactions, meaning that the insurance company and bank are part of the same Group. Henry explains that currently, those transactions are subject to regulatory scrutiny to ensure risks are captured properly but also tax authorities and auditors require transactions are done on an arms length and transparent basis.

Meanwhile, disclosures on stock lending in mutual funds is also a reported activity, something commonly understood by mutual fund trustees.

“There is something to be said about treating customers fairly and that the churning of a portfolio ought to be disclosed more widely than it is and there ought to be a better spread of the fees earned from such transactions because they accrue to the manager rather than to the investors,” Henry says. “But it would have been helpful if the FSA could have spent a bit more time talking to participants and given us some clear conclusions based on a pool of transactions…so we can start thinking about how this plays into financial stability.”

Apart from banks feeling pressured by Basel III and the capital requirement directive CRD IV, the insurance fund industry is facing regulations under Solvency II, which could make these transactions "uneconomic" according to the FSA.

“These rules are being developed in isolation and that silo [mentality] leads to issues not being addressed, because they fall through the gaps, but also unintended consequences,” Henry says, adding that if banks cannot swap riskier pools of assets with pension funds and insurance companies, it is not clear where those assets will go to relieve pressure on balance sheets.



Vanguard to open ETFs to sec lending
Vanguard Asset Management is preparing to allow select exchange-traded funds to engage in securities Read more

FSB: members must improve OTC margin compliance
Around half of Financial Stability Board member jurisdictions need to “urgently take steps” to g Read more

BCBS advises G20 to delay CCP reg deadline
The deadlines for implementing Basel III’s capital requirements for CCP exposures and margin requi Read more

EXCLUSIVE: Eurex offers respite from capital costs
Eurex Clearing is preparing to offer a new hybrid membership model that combines elements of a direc Read more

Bank of Japan: Fintech the future for financial services
Blockchain and artificial intelligence are likely to play a large part in financial services in the Read more

Securities Lending Times site map
Home
Home

Sitemap

Issue archive
Back issues online
Recruitment
Recruitment

Events and Training
Upcoming events

Upcoming training

Company info
About us

Contact us


Copyright (C) 2016 Black Knight Media Ltd. All rights reserved. No reproduction without prior authorization
[close]
Never miss an issue again
Subscribe to Securities Lending Times - Get it delivered straight to your inbox
We need to know you are not a ROBOT. Please type HUMAN in the box below and continue to fill in the rest of the form