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that markets across Europe did not see some of the During a period of intense volatility and competing In terms of institutional involvement in this important
market dislocation seen in North America, where lending forces on investment portfolios (including underlying sector of the market, government bonds made available
markets were used to provide much needed liquidity. ‘sell’ decisions), it would appear some of the normal for lending were still dominated by government
parameters around which these books would trade fell institutions such as Sovereign Wealth Funds (SWF),
In terms of institutional Government bond lending has over time moved away in March and April, leading to these abnormal that represented some 27% of all available supply.
involvement in this important towards a non-cash collateral market, where trading profiles. One of the contributory factors here That supply dominance was translated into an equally
borrowers collateralise loan positions with other
in addition to underlying sell-offs, may well have been
dominant share in on-loan balances, where government
sector of the market, securities. This has been especially true in Europe a desire from some institutional lenders to reduce or institutions and SWFs accounted for 30% of open loan
government bonds made where regulation restricts the acceptance of cash suspend some of their lending activities. Whilst we balances at the end of June.
didn’t witness the widespread withdrawal from lending
collateral securities lending (UCITs) are constrained
available for lending were still on investing beyond 7 days. Historically, non-cash programmes as seen in 2007/08, this may have been a The role of SWFs in this sector has been noted in
dominated by government trades have been predominantly regulatory driven, factor in pushing on-loan balances down in the second previous editions, where we have remarked on the
quarter of the year.
with borrowers looking to use high risk weighted
growing dependancy on supply and therefore liquidity
institutions such as Sovereign assets (RWA) such as equities, to secure HQLA provided by this community (they provided important
balance sheet friendly government bonds. When these
liquidity into the US Treasury market when it was
Wealth Funds (SWF), that trades are combined with a term element of three needed). As regulators think more broadly about
represented some 27% of all months or more, the HQLA assets may be used as the lessons learnt from this crisis, the key themes of
available supply part of the borrowers Liquidity Coverage Ratio (LCR) liquidity and volatility will be repeated over and over
calculation. This has meant that borrowers and to an 5% 3% 3% again. It is important to understand therefore how
extent lenders, have prioritised these trades over key regulators and policy makers respond to these changing
regulatory reporting dates (such as year or quarter market dynamics.
Whist we saw a significant reported outflow of ends). In general and notwithstanding the lower
European government bonds from lending programmes, concentration of cash collateralised trades across this 27%
which is very much in line with what was happening in market, it has tended to be these trades that have 28%
North America, we did not see a corresponding uptick in therefore been reduced or returned first. When we Fig 10: Global Government Bond
on-loan positions. The drivers behind this view are likely examine the first half of 2020 however, we see the Lendable Supply by Fund Type
to be varied, but the absence of the sudden demand to exact reversal of this trend, with cash collateralised Source: DataLend
borrow additional European government bonds suggests loans remaining fairly constant over the period. 10% 9%

2%
8%
Fig 9: Global Securities Lending Government Bond Market - Cash Versus Non-Cash Source: IHS Markit
€320B €880B 26%
28% Fig 11: Global Government Bonds 30%
On-Loan by Fund Type
On Loan Balance vs Cash €270B €810B On-Loan Balance vs Non-Cash Corporations/LLP/LLC
Banks/Broker Dealers
Source: DataLend
Foundation/Endowment
Government/Sovereign Entities/Central Banks
Insurance Companies
Mutual/Retail Funds 5%
Pension Plans 16%
€220B €740B
Jan 20 Feb 20 Mar 20 Apr 20 May 20 Jun 20 Undisclosed/Other

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