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collateralised with JGBs, as the rates demanded by lend-  December. With the increased issuance of US Treasuries
           ers to roll these positions rose.         and holdings on broker-dealer balance sheets, the need   Fig 8: European Securities Lending Government Bond Market
                                                     to borrow HQLA assets fell away.
           As we look towards the latter part of 2019, we also                                           €980B                                                                    €320B
           observed a discernable increase in borrowing of gov-  Despite the increased trading volatility and rising demand
           ernment bonds into the year end. Further analysis of this   in Europe in the latter part of 2019, revenues for lending
           trend highlights that most of this increase was in Europe.   government bonds showed a year-on-year fall from 2018,
                                                     declining circa 20%.
           In the final six weeks of 2019, on-loan balances of
           European government bonds increased by some 15%.   Whilst the drivers of supply and demand are varied, the   Total Lendable Assets                                      On-Loan Balance
           This demand was driven largely by higher valuations in   imminent arrival of new UMR for non-centrally cleared
           the equity markets (inflated trade values), and the unwind-  derivatives for many buy side clients later this year,
           ing of long Gilt positions as traders looked to source core   could materially change the latent demand for HQLA
           Euro government bonds.                    type assets.
                                                                                                         €890B                                                                    €270B
                                                                                                                 Jul 2019   Aug 2019   Sep 2019   Oct 2019   Nov 2019   Dec 2019
           In the US, we saw the impact of the previously discussed   The securities lending market for government bonds is
           liquidity events within the repo markets, that spilt into   still very much a non-cash collateralised market. Fig 10                                           Source: IHS MArkit
           the securities lending markets as banks appeared to be   highlights how traders reduced US Treasury and JGB
           borrowing securities for defensive reasons (see Fig 9).   positions into October, as the US Dollar/Japanese Yen   of years. We have discussed in previous reports the link   Additionally, cash reinvestment opportunities are
                                                      basis spread increased, and we saw progressive build of   between the lending of HQLA and regulatory compliance   typically limited in nature as the availability of unse-
           Immediately after the crisis in mid-September, we saw   European on-loan positions against non-cash collateral   with prudential hurdles such as the LCR. From our pre-  cured issuance and repo dries up when bank balance
           utilisation levels fall away with some building of positions   into the year end. Review of the collateral profile for gov-  vious work in this area, we know that most term HQLA   sheets contract over reporting periods. Although we
           again into the year end.                  ernment bonds in Europe highlights this trend.   business is undertaken within a non-cash framework, and   did observe a marginally greater interest in maintain-
                                                                                                      it is therefore not surprising that banks wanting to keep   ing some cash collateral investments over the year end,
           As the Fed positioned itself ahead of the year end,   The relationship between this market and the use of non-  these important regulatory trades on are clearly prioritis-  investors saw some yield opportunities. Part of the driv-
           the liquidity seen in September failed to reappear in   cash collateral, is a feature we have tracked for a number   ing them over the regulatory reporting date.   ers behind the mobilisation of HQLA in the context of

            Fig 7: Global Securities Lending Government Bond Market                                    Fig 9: US Treasury Bonds On-Loan


              €3.1T                                                                    €1.02B            €700B



                Total Lendable Assets                                                  On-Loan Balance     US Treasury Loan Volume  (Market Value)









              €2.8T                                                                    €0.93T            €550B
                     Jul 2019   Aug 2019   Sep 2019    Oct 2019   Nov 2019   Dec 2019                            Jul 2019   Aug 2019   Sep 2019   Oct 2019   Nov 2019   Dec 2019
                                                                              Source: IHS MArkit                                                                          Source: FIS Global



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