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supply of just over €14.5 trillion. This represented a 5% America. The market also reflected something of a tech-
decrease in on-loan balances, and a 9% rise in securities nical change in the second half of the year. As Deutsche Fig 16: Global Securities Lending Equity Market - Cash Versus Non-Cash
being made available for lending by institutional investors. Bank exited the prime finance-related equity borrow-
ing markets in the late summer, these balances many of €440B €700B
However, these increases should be considered within which had been in the form of Total Return Swaps (TRS),
the context of the previously discussed sharp increases were replaced (at least initially) in the physical markets
in equity market valuations over the period. Taking into by other dealers. Balances fell away again in October
account experiences from prior reporting periods and the as these dealers progressively optimised their positions.
impact that changes in asset prices can have on securities Although lending revenues were generally down on
lending programmes, we are confident that most of the the record levels of 2018, those institutions who held On-Loan Balance vs Cash On-Loan Balance vs Non-Cash
reported increases in available inventory are asset driven so-called ‘hot stocks’ did well, with a high proportion of
by price inflation, rather than significant new loans or revenues in the sector coming from a small community of
equity assets coming into lending programmes. specific names.

As we think more broadly about the role of lending and In Europe, on-loan balances traded within a small range €370B €0
retail investors, it is worth noting the growing impor- during the second half of the year. Although it is hard to Jul 2019 Aug 2019 Sep 2019 Oct 2019 Nov 2019 Dec 2019
tance of the sustainable finance agenda and ESG invest- be specific as to why the markets here appeared to lack Source: IHS MArkit
ment principles. For our markets, we have some very real conviction, there is no doubt that the political uncertain-
challenges to ensure that there is sufficient secondary ties across Europe have contributed to the picture. Whilst are aware of initiatives being led by our sister association, loans (see Fig 17) reflected much of the marginal on-loan
market liquidity through the provision of securities lend- the Brexit agenda has dominated the debate in the UK, the RMA, in conjunction with the regulatory community balance volatility over the period.
ing to compliment and support investors in and around we should not forget that the rest of Europe has seen to raise awareness of the role that non-cash collateral can
these markets. the arrival of a new Commission and Parliament. As both play within lending programmes as an alternative to the There was also some indication that cash collateralised
of these bodies start their work in earnest in 2020, we traditional US cash-collateral business model. trades came off first ahead of the year end, reflecting the
The provision of a deep and liquid supply of ESG securities can expect a new and bold agenda across Europe, nota- desire to keep non-cash business on books over the year
will facilitate effective price discovery for investors, and bly the CMU project which will come to the fore as the In Europe, whilst non-cash balances remained reasona- end for balance sheet and regulatory reasons.
ensure sufficient market liquidity to allow them to enter UK leaves. bly unchanged throughout the period, cash collateralised
and exit these markets and investments. Aligning the
governance principles that are enshrined in this invest- The role played by non-cash collateral, particularly in fixed Fig 17: European Securities Lending Equity Market – Cash Versus Non-Cash
ment ethos with securities lending is also an important income markets is now well understood. In equity markets,
consideration. It is critical that investors aspire to dis- we have seen a constant drift towards the use of non-
charge their governance obligations in an appropriate cash collateral as well. Although we would expect the pre- €38B €150B
and responsible way. The recently launched ICSF will be ponderance of non-cash collateral to increase over time,
an important platform and conduit to take these funda- it has been stuck at around 60% globally for some time.
mental issues forward.
Although this relationship did not change materially dur-
If we look at the second half of 2019 in greater ing the second half of 2019, we did see some greater On-Loan Balance vs Cash On-Loan Balance vs Non-Cash
detail, themes identified elsewhere in this report are use of cash collateral during the period. With some indi-
repeated here. cations of a return of limited reinvestment opportuni-
ties, combined with banks being long of cash liquidity,
Inventory, or securities that are available to lend gener- we saw what looked like tactical use of cash collateral
ally tracked up over the period, reflecting the change in (see Fig 16). €19B €75B
underlying asset values. On-loan balances increased into Jul 2019 Aug 2019 Sep 2019 Oct 2019 Nov 2019 Dec 2019
the fourth quarter, reflecting in part strong IPO and cor- In North America, non-cash collateral remains around Source: IHS MArkit
porate actions-based transactions, particularly in North 46% of all collateral pledged in respect of equity loans. We

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