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collateral mix, collateral spikes (particularly around non- €1.4 trillion of securities held with European tri-party
cash collateral) over the period relate almost exclusively providers. This is broadly unchanged from six months
to government bond lending. earlier, although we did observe some interesting shifts in
the balance between the use of equities and government
In the final weeks of the period, there was clear evidence bonds as collateral (Fig 21)
of borrowers reducing cash collateralised balances
ahead of the half year, although the trading anomaly As at the end of June, equities used as collateral were
seen in the final days of the half year appeared to reported at 43%, a marginal two percentage point increase
have impacted both cash and non-cash collateralised from six months earlier. The reasons behind this shift
loans alike. resonate with other changes and behaviours seen across
the equity world. In particular, increasing asset valuations
Furthermore, we know that borrowers or banks who in the first six months of the year will have impacted equity
use the lending markets to secure HQLA assets for collateral pools, thereby increasing some of their value.
LCR purposes, normally prioritise these trades over key Not surprisingly, borrowers appeared to have therefore
reporting dates as part of their bank-wide balance sheet chosen to reduce the level of government bonds being
management activities. As most of these term transactions used as collateral. With the end of QE reducing some
are normally against equity collateral, we tend to see a of the velocity in government bond markets, combined
level of rigidity around non-cash collateral even around with the relative expense of using government bonds over
key reporting dates. Having said that, this expected norm equities as collateral, the fall from 48% to 46% of all non-
was challenged this year as the demand for HQLA assets, cash collateral is not unexpected.
particularly in Europe fell, pushing borrowers to unwind
these traditionally sticky non-cash trades. As we delve a little more deeply into how government
bonds are being used as collateral, we have observed
Collateral Dynamics For the non-cash collateral held in Europe, we have seen again the clear relationship with other elements of the
for some time now how this market has developed but
global FX and short-term money markets. As we look
also how it responds to changes in the underlying cash at the dispersal of government bonds held as collateral
markets. As at the end of June 2019, there was circa by domicile of issuer (Fig 22), as expected bonds from

Fig 20 - Global Securities On-Loan - Cash Versus Non-Cash
As we contemplate the impact of waves four and five of The beneficiary or recipient of the overcollateralisation
the implementation of the new margin rules for uncleared or haircut is nearly always the institutional lender of the
€900k €1,500k
derivatives, it is worth pausing for a moment to look at security. This ensures that the underlying beneficial owner
some structural differences between securities lending of the security enjoys the highest level of protection
and other fully collateralised markets. Derivatives as available in terms of initial trading risk.
well as repo markets use the idea of initial and variation
margin. Initial Margin (IM) may be described as a haircut; In other markets, open transactions are assessed on an
the difference between the initial market value of an asset on-going basis, with Variation Margin (VM) being called
and the purchase price paid for that asset at the start of for to cover adverse mark-to-market (MTM) movements On-Loan Balance vs Cash (M) On-Loan Balance vs Non-Cash (M)
a transaction. over the life of the transaction. In securities lending, the
process is similar but the daily MTM process is typically
The difference between the two is merely a matter of undertaken at a counterparty exposure level rather than
expression. A haircut is expressed as the percentage on an individual trade-by-trade basis.
deduction from the market value of collateral (e.g. 2%),
whilst an initial margin is the initial market value of The global collateral footprint for the first six months of the €600k €1,200k
collateral expressed as a percentage of the purchase year (Fig 20) highlights the key regulatory role played by Jan 2019 Feb 2019 Mar 2019 Apr 2019 May 2019 Jun 2019
price (e.g. 105%). The concept is no different for our non-cash collateral. With equity lending markets relatively
Source: IHS Markit
markets, however there is one significant difference. stable in the context of both overall balances and the

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