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Although mutual funds account for 44% of all securities made available for lending they now only account for 18% of total on-loan balances. This anomaly was identified in previous International Securities Lending Associations’(ISLA) reports and now appears to be a permanent shift in market behaviour. It is increasingly likely that this reflects the restrictive regulatory environment applied to this sector in respect of securities lending.
Securities lending is still a very important revenue stream for institutional investors. Figures recently released by Datalend suggest that the securities lending industry globally generated Euro 8bn of revenues in 2015, with Europe accounting for circa Euro 2.6bn.
As at 31st December 2015 government bonds accounted for 37% of all securities on-loan. Although the proportion of government bonds on-loan globally has increased steadily over the past 12 months it was possible to see a marginal fall in on-loan balances towards the year-end. This probably is an indication of active balance sheet management ahead of the year end rather than a reversal of the trends seen over the past two years.
Globally, equities still dominate representing 51% (Euro 1.01 trillion) of all securities on loan as at 31st December 2015. Of securities made available for lending by institutional investors, equities account for just under Euro 9 trillion of the Euro 14 trillion of securities held in lending programmes globally.
The mix between non-cash and cash collateral stabilised during the last six months of 2015 at 60/40 globally. Europe continued to record much higher levels of non-cash collateral as banks and brokers repositioned their balance sheets to comply with new regulations. For example, in excess of 90% of all government bonds which are lent in Europe are now collateralised with non-cash collateral.
The proportion of equities held in tri-party services fell to 51% from 57% six months earlier. The reasons for this reversal of previous trends may be a combination of more efficient collateral management within banks, reducing the reliance of external funding combined with a natural reduction in business volumes ahead of the year-end. This dynamic will be closely monitored in future reports.
As regulation moves into legislation and implementation market behaviour has changed. Basel III and the Liquidity Coverage Ratio (LCR) have effectively created a term market in HQLA that didn't exist two years ago. Today circa 25% of all government bonds are borrowed for three months or more.
Further regulatory pressure could push institutional lenders away from the securities lending market. The combined and rolling impact of compliance with various regulatory regimes such as Securities Financing Transactions Reporting (SFTR), the Bank Recovery and Resolution Directive (BRRD), the Central Securities Depository Regulation (CSDR) and further restrictions on UCITS may cause some lenders to withdraw from the market rather than comply with this array of new regulation. This in turn could lead to a loss of market liquidity and make it harder and more expensive for institutional investors to invest in equity markets and for government institutions to issue and manage existing government bond programmes.