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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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