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Collateral Dynamics collateral as well as automating the management of the
collateral process. Securities lending markets in Europe
were one of the first markets globally to embrace the
use of equities as collateral, and through the use of
We have already highlighted comments made by the independent tri-party agents a sophisticated network Pressure was also seen in the
BoE in early June, regarding the increased margin of services providers now support the industry. This derivatives markets more widely,
requirements seen across UK CCPs in March. This led means that although the past six months have not
in part to a ‘dash for cash’, as some market participants been without pressure points across the industry, the where recently introduced
With non-cash collateral had insufficient cash and cash-like assets to meet actual collateral infrastructure has worked well in supporting it Uncleared Margin Rules meant
loans making up the or anticipated margin calls. Pressure was also seen in through these challenging times. that for the first time many
the derivatives markets more widely, where recently
vast majority of the introduced Uncleared Margin Rules (UMR) meant that We have for some time followed the development buy-side firms were grappling
market today, the scale for the first time many buy-side firms were grappling of collateral in our markets, and typically see a broad with their responsibilities to
split between government bonds and equities; each
with their responsibilities to ensure that their derivatives
and complexity of the exposures were appropriately collateralised. With many asset class normally makes up between 40 and 45% ensure that their derivatives
collateralisation process market participants using equities as collateral, the respectively of all collateral held in European tri-party. At exposures were appropriately
picture was further compounded by the sudden falls
the time of our last report in December 2019, the split
makes it integral to risk in equity market valuations that would have triggered was 45% for both government bonds and equities, with collateralised. With many market
management within further margin calls across all of collateralised markets. corporate bonds making up the remaining 10%. At the participants using equities as
end of June, the picture was very different.
the industry As equity markets lost value and remained highly collateral, the picture was further
volatile, counterparts had to look for alternative forms
of collateral. Where we have seen similar but less compounded by the sudden
extreme falls in equity markets in the past, market falls in equity market valuations
participants have tended to switch to using government
bonds as collateral. Whilst these are likely to be more that would have triggered
expensive to finance, they do offer the recipient (the further margin calls across all of
In previous editions of this report, we have discussed lender) a normally high quality and low risk form of 13%
how securities lending can provide a fascinating window collateral. Government bond markets were themselves collateralised markets
into elements of the capital markets that tell us how under pressure however, with liquidity issues seen in
efficiently they are functioning. The past six months has North America and funding concerns in the UK, which
seen moments of considerable strain on operational led to the provision of support from the central bank
infrastructures, including the provision of collateral community in the form of increasingly large and wide- Fig 20: Securities Lending Collateral
which has at times led to a very different collateral ranging asset purchase programmes. Whilst providing Held in European Tri-party
mix across our industry. With non-cash collateral loans much needed liquidity to allow key bond markets to Source: BNY Mellon, Clearstream,
making up the vast majority of the market today, the continue functioning, these programmes also have the 52% Euroclear & J.P. Morgan
scale and complexity of the collateralisation process effect of taking securities out of the markets. As these 34%
makes it integral to risk management within the industry. programmes have expanded, they have also covered
other fixed income asset classes, such as corporate
As we think about the collateral environment during credit, municipal debt and asset backed securities. Equities
the past six months, it is important to consider what Corporate Bonds
was driving the market at that time, and how this Securities lending markets have historically been at Government Bonds
would have affected the use of collateral more broadly. the leading edge when it comes to both thinking about Other

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