Non-Cash Collateral Takes Prevalence Amongst Lenders, find ISLA

Market participants have increased their move towards holding and accepting non-cash collateral, as stricter regulations are forcing borrowers to think about different forms of collateral.

According to a report from the International Securities Lending Association (ISLA), €1.7 trillion of securities were on-loan globally at the end of 2014, of which there was a 55/45 split between non-cash and cash collateral received by lenders.

In particular to government bond lending this trend was the most extreme, with only 10% of loans of European government bonds being booked as cash collateral loans.

The shift towards non-cash collateral comes as banks are incentivised to reduce their cash collateral balances to lenders. This provides greater support because of lower risk-weighted assets (RWA) costs than cash collateral, ISLA says.

However, ISLA found that in some markets, such as the U.S. equity lending market, there is still heavy reliance on cash collateral.

The result of these different standards to collateral acceptance is set to create “clear sub markets that will develop differently over time,” ISLA says in the report.

It also states that the majority of non-cash collateral received by lenders at the end of last year was held and managed by specialist tri-party agents. According to data from BNY Mellon, J.P. Morgan, Clearstream and Euroclear, 53% of tri-party non-cash collateral were equities, followed by government bonds (34%) and corporate bonds (12%).

“This reflects in part the greater complexity associated with issues such as monitoring and protecting clients’ interests around corporate actions and the operational intensity of dealing with equity collateral which, unlike fixed income government bonds, tends to be multiple lines of stock in any given collateral pool,” the report adds.