30 August 2017
Reporter: Drew Nicol

Securities lending market adapting to liquidity crunch, says ISLA

Quarter-end volatility calmed in the first half of 2017 as the market reinvested earlier and ahead of a potential squeeze, according to the International Securities Lending Association (ISLA).

In its seventh market report, ISLA noted that, while balance sheet reduction at key reporting dates has become a permanent feature of borrower behaviour, the recent quarter ends were completed in “a more steady and orderly manner than previously observed”.

ISLA noted that, after unprecedented volatility and dislocation was observed at the end of December 2016, the market better anticipated the end of June liquidity squeeze by reinvesting from the middle of the month onwards.

The report continued: “We also saw a willingness to recall cash collateralised loans ahead of the 30 June and return any cash collateral to the borrower, thereby avoiding any reinvestment issues over half year end. Demand to borrow government bonds remained robust during the first six months of the year.”

As part of ISLA’s work to consult with regulators to tackle market issues such as liquidity squeezes, the association commended the European Securities and Markets Authority (ESMA) on its recent opinion on minimum EU-wide segregation requirements for UCITS and alternative investment funds.

ISLA described the statement, which is part of an ongoing consultation, as a pragmatic and viable framework for this business to continue.

The work could have significance in relation to potential changes to UCITS regulation, which, as a securities lending market demographic, is struggling to contribute under oppressive collateral rules that limit term trades to seven days.

Inconsistencies in the interpretation of guidelines by local regulators has also made these fund types increasingly less competitive versus peers.

ISLA’s latest data, which is sourced by the three main data providers in the market, continues to highlight that while mutual funds, including UCITS, account for now just under half of all securities made available for lending (46 percent), their proportion of all open trades still remains disproportionate at roughly 14 percent.

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