THOUGHT LEADERSHIP
Securities lending opportunities in a rising rate environment
Michael Saunders, head of agency lending Americas at BNP Paribas Securities Services explores some of the opportunities that the rising interest rate environment has created within securities finance. If we look at the overall securities financing market, approximately two thirds of all loan balances globally are against non-cash collateral – although that ratio is inverted in the US where cash collateral dominates. Despite the excess liquidity in the markets, compelling opportunities exist to capture excess return through the acceptance of cash collateral in securities lending transactions. The Federal Reserve’s reverse repurchase programme is reaching new highs on a daily basis, hovering in excess of $2.2 trillion, highlighting the excess liquidity prevalent in the market. Despite the surplus of liquidity and spread compression, central banks are tightening monetary policy globally, which represents significant opportunities for sophisticated beneficial owners. A rising rate environment, where some central banks have been very transparent about their plans for further increases, has led the forward market to anticipate upwards of 200 basis
points of Fed rate increases over the next nine months. Cash collateral reinvestment “If you are a beneficial owner participating in a securities lending programme, given the choice to transact against cash or non-cash collateral, I would be in favour of receiving cash collateral because the opportunities in the market are far greater,” says Michael Saunders. Beneficial owners opting to invest their cash collateral in typical money market instruments can capture some of that anticipated rate hike premium. It is an opportune time to implement a duration-mismatched programme, lending assets on a short-term basis while investing the cash collateral for longer tenors. However, engaging in a duration mismatch strategy should be part of a cash reinvestment strategy, with beneficial owners remaining cognizant that funding conditions and basis mismatch can quickly erode the potential uplift.
If you are a beneficial owner participating in a securities lending programme, given the choice to transact against cash or non-cash collateral, I would be in favour of receiving cash collateral because the opportunities in the market are far greater Securities Finance Americas Guide 2022
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