LONDON: If pension funds, insurers and sovereign wealth funds were hoping to cash in on lending “high quality” assets to those scrambling to meet tougher collateral requirements in 2014, they are likely to be disappointed.
The phasing in of the US Dodd-Frank Act and its European equivalent EMIR (European Markets Infrastructure Regulation) over the next 18 months is expected to boost demand for assets like top rated sovereign debt to back derivative trades.
But for all the industry warnings of a squeeze in supply — dismissed by regulators as a tactic to lobby for weaker rules — the amount of available collateral outstripped demand last year and things are unlikely to change much near term.
“People are still expecting this demand to come but there’s plenty of supply at the moment and until that comes under pressure, fees won’t rise appreciably,” said David Lewis, Senior-Vice President at Sungard’s data firm, Astec Analytics.
If all derivative deals are forced to go through central clearing, where both parties would be asked to post collateral, some industry bodies have suggested it could lead to demand for new collateral of between $800bn and $10 trillion.
Other new rules, also aimed at applying lessons from the 2007/09 financial crisis, will force banks to hold buffers of government debt to withstand shocks unaided.
That ought to be good news for the big funds, which tend to hold pools of such “safe”, low-yielding assets and many of which welcome a chance to earn more by lending them out.
Sungard said stock lending rose around 15 percent last year. The volume of bonds borrowed rose 20 percent, but fees earned by those lending them did not rise. “If anything, we saw returns from government bond lending drop a little bit. The average return from a global bond lending program is around 15 basis points (bps), so it’s not a massive revenue earner yet.”
Assets on loan are worth around $1.8 trillion globally and are roughly split 40:60 between bonds and equities, although the value on loan rises sharply during the dividend season.
Most bonds are borrowed for collateral or to help manage financing operations at banks, while stocks are mostly lent for market making or to proprietary traders such as hedge funds betting on a price fall.
Low-fee assets of below 20bps — mostly high quality debt borrowed for a short time — make up around 80 percent of total lending by volume, while the top-earning deals are largely from stock lending.
Reuters
