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Securities Lending and Repo – the “front Liquidity – a multilateral influencer. In the same report, ESMA noted that EU Money Market
Funds (MMFs) were particularly affected due to heightened
line workers” of financial services As markets increasingly realised that Covid-19 was an redemptions on the liability side, as part of the ‘dash for
cash’, while on the asset side the liquidity of commercial
international and not a regional public health event, we
experienced a dramatic migration away from risk assets in paper markets deteriorated quickly. Often utilised within
Maurice Leo, in Deutsche Bank’s Agency Securities Lending team, assesses the February 2020. Global equity indices tumbled during the securities lending programmes for the (re)investment of
cash collateral, ESMA indicated that there will be further
last week in February, with the S&P 500 and the STOXX
important role of securities lending and repo in accommodating and facilitating 600 experiencing their largest weekly declines since focus on MMFs within its 2021 Work Programme².
market order and liquidity during pandemic-related volatility October 2008. In March, the S&P 500 was down -12.4%
on a total return basis, a “modest” decline relative to ESMA did note that whilst there were a small number
In just under twelve months, we have experienced a Liquidity Motivation: Southern European equities as Italy’s FTSE MIB and Spain’s of cases requiring UCITS / AIFs to implement Liquidity
widespread reassessment of priorities and behaviours. IBEX 35 were both down >22%. The Hang Seng was Management Tools (LMTs), these arose from valuation
We now measure our employment commute in The Liquidity Motivation tends to be a determining amongst the best performing indices with a 9.5% decline concerns in fast moving and one-sided markets. There was
metres not miles, parents reluctantly became tutors, criterion for Asset Owners such as pension funds or in March. In a year of the extraordinary, April then became no association between LMT adoption and participation by
children – often willingly in an act of reprisal - became sovereign investors. the best month for the S&P 500 (up 12.5%) since January the underlying funds in securities lending as was the case
hairdressers, bankers became bakers and many 1987. Yet we were in a period where the world economy in certain fund complexes in 2008.
households welcomed pandemic puppies – who It enables investors to recalibrate their lending practically ground to a standstill. Try explaining that to a
also became the disposal outlet for some of the less programme to become 1) a source of cash or 2) a new graduate. The aforementioned volatility triggered an Insurers are an important liquidity demographic in
successful baking endeavours! mechanism for collateral transformation in order to meet initial squeeze on liquidity. Throughout the market, we saw securities lending and repo markets, particularly the
margin requirements arising from their core portfolio institutional clients become nervous about their liquidity HQLA lending sector given their sovereign debt bias and
In the Securities Finance industry, there was also a re- management activity. profiles with redemptions and margin requirements the portfolio features. Participation by this beneficial owner
stacking of priorities and approaches. This traces back to overarching considerations in H1 2020. constituency was amongst the most disrupted during 2020
the primary motivation influencing institutional investors This motivation was epitomised by the formal as insurers took defensive measures to safeguard access to
to participate in securities lending and repo markets. establishment of the Global Peer Financing Association In the regulated fund sector, European and US domiciled liquidity against fears that the pandemic would prompt a
in mid-2020, an organisation that now encompasses 11 fixed income funds experienced the largest investor surge in claims and a sharp rise in their cash requirements.
In our experience, the primary motivation to engage in global members with >USD6 trillion in AuM. outflows in Q1 at -€80bn and -€135bn respectively, By early Q3, most of these clients had become more
securities lending and repo differs across institutional although these amounted to ≈2% of total product AuM. comfortable with their liquidity positioning, given the
investors but is summarised in the following trinity: These trends reversed in Q2 with European fixed income beneficial impact of Central Bank interventions in the
Revenue Motivation: products securing €71bn and US offerings gathering intervening period, and had resumed securities lending
€194bn in net sales. In Europe, the absence of any activity after a brief hiatus.
Orderly Market Motivation: Historically the most visible incentive for institutional disruption to investor redemptions owing to securities
investors to participate in securities lending has been the lending activity appeared to vindicate ESMA’s decision to For sovereign investors, particularly those with
In addition to the execution of monetary policy, Central revenue motivation – capturing the value embedded in introduce collateral diversification and term restrictions for commodity-orientated economies, the experience
Banks have long recognised the invaluable role of otherwise dormant assets for the benefit of end investors/ UCITS lenders post the 2008 global financial crisis. of the global financial crisis coupled with more
securities lending in the orderly functioning of bond and clients. Best illustrated by the fact that, in normal times, as cautious end-of-cycle positioning left them with
repo markets. Orderly markets stimulate financing through an industry, we have a tendency to measure our success In November 2020¹, ESMA highlighted that redemption portfolios capable of contending with the government
capital markets as opposed to bank balance sheet led against the revenue indicators published by various demands in a deteriorating liquidity environment were withdrawals that emerged in Q2 to support immediate
solutions that have been more customary in Europe. independent data vendors. particularly challenging for EU investment funds that had deficits in public finances.
invested in less liquid assets, such as corporate HY bonds
Securities lending also underpins reduced trading costs In 2020, we witnessed a rebalancing of investor and EM bonds. These observations amplify the strategic In the three weeks to March 25th there were record
due to improved transaction settlement rates and narrower motivations as liquidity moved centre stage with all the importance of ensuring continuity of securities lending volumes (USD100bn) of sales by Foreign and International
bid/ask spreads. panache of a former Mayor of London playing street supply as a liquidity reservoir for in scope securities as the Monetary Authority (FIMA) holders of Treasuries. This
rugby with primary school children in Tokyo. effective date of the Settlement Discipline Regime within coupled with the flight to quality and the associated
This benefits the widest outreaches of the market including This article examines the coalition of liquidity, CSDR approaches. demand for US dollars contributed to a surge in volatility in
those investors that remain opposed to the practice of securities lending and repo in 2020 from a beneficial March to levels not seen since 2008. The Fed responded
securities lending. owner standpoint. ¹ESMA recommendation of the European Systemic Risk Board (ESRB) on liquidity risk in investment funds ²ESMA 2021 Work Programme

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