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
No bid for LSE, confirms ICE
05 May 2016 | London
Intercontinental Exchange has confirmed it will not place a counter-bid to Deutsche Börse’s offer for a merger with the London Stock Exchange Group... Read more

Eurex Repo sees volume drop-off in April
04 May 2016 | Frankfurt
Eurex Repo, which operates the GC Pooling and Euro Repo markets, suffered a 22 percent drop in its monthly outstanding volume in April... Read more

For more news visit our news section

Upcoming events
Collateral Excellence Conference
Date: 16-17 May 2016
Location: New York, NY
Find out more

ICMA Annual General Meeting & Conference 2016
Date: 18 - 20 May
Location: Dublin
Find out more

For more events visit our event section
Industry recruitment
Capital Markets - Project/Programme Manager
Recruiter: Alexander Ash
Location: London
Find out more

Senior Sales
Recruiter: CloudMargin
Location: Europe
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
Strength in numbers
Feature: The SFTR’s technical details still need to be thrashed out, but early reports suggest that the securities lending industry has its work cut out Read more

Asia
Country profile: A difficult end to 2015 has not deterred securities borrowers and lenders in Asia, where certain markets enjoyed significant growth and offered new opportunities Read more

Richard Déroulède :: Societe Generale
Interview: Societe Generale’s Richard Déroulède discusses the collateral shortage, arguing there is no need to get carried away with the idea of a lack of liquidity 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.



No bid for LSE, confirms ICE
Intercontinental Exchange has confirmed it will not place a counter-bid to Deutsche Börse’s offer Read more

Eurex Repo sees volume drop-off in April
Eurex Repo, which operates the GC Pooling and Euro Repo markets, suffered a 22 percent drop in its m Read more

IBM tackles blockchain's security concerns
US technology giant IBM is working with securities borrowing and lending participants such as BNY Me Read more

Saudi Arabia opens door to securities lending
Saudi Arabia’s Capital Markets Authority has approved the introduction of securities lending and c Read more

OCC’s sec lending sees bumper April
Options Clearing Corporation cleared almost double the number of new loans in April than it did in t 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