Podcast: how central banks are using securities lending

Central banks are “critical” players in the securities lending market. Securities lending is the lending of stocks or bonds for which a borrower provides collateral and pays a fee.

Securities lending works as a “portfolio overlay strategy to deliver alpha or excess return to a portfolio of fully paid securities,” says Michael Saunders, head of agency lending for the Americas at BNP Paribas Securities Services. central bank.

Central banks may use securities lending to inject liquidity into a market or to increase their own returns.

In this central bank podcast, Saunders explains why high-quality liquid assets from central banks are highly sought after in the market.

“There are about $24 trillion in assets in the supply-side securities lending market, with about $2.5 trillion in assets on loan,” Saunders said.

Breaking that down a bit further, “about $2.2 trillion in sovereign debt is available for market lending,” with a current balance of “about $800 billion.”

Market participants may wish to borrow high-quality liquid assets to meet regulatory ratios, such as the liquidity coverage ratio or net stable funding ratio.

Another driver of demand for securities lending is opportunistic lending or trading. This can be achieved by “taking advantage of trading in basis spreads between currencies”. This is often a measure of the shortage of dollars in the market.

Central banks can also trade on the “specialty” of a specific issue, whether it is a British gilt, a German Bund or a US Treasury, which is the subject of a request. outstanding in the market.

Because central banks provide liquidity to the market, by injecting assets that are demanded by counterparties, they are “ideal” participants in securities lending.

“Most central banks prefer to operate on what’s called a cashless collateral transaction,” Saunders says. This means that they are ready to accept securities for the one borrowed by a counterparty.

There are also capital advantages for banks’ risk-weighted assets when borrowing securities, as well as balance sheet advantages, which allow counterparties to borrow ‘significantly’.

Despite the “substantial” decline in some central banks’ reserve portfolios to fund socio-economic campaigns following the turmoil of recent years, Saunders says he sees central banks willing to engage in lending. low-margin, high-notional-volume securities.

Whether transforming collateral, monetizing special transactions, or engaging in cross-currency collateral swapping, all three of these dynamics are transparent from a pricing perspective, Saunders says.

Index

1:00 Presentation

3:31 Types of loaned securities

5:54 Borrower goals

7:52 Demand factors

9:47 Pricing

11:49 Cross border loan