Liquidity worries in securities finance space could impact buy-side participation, according to a panel at the Euroclear collateral conference in Brussels.
One buy-side participant explained how securities finance is delivering increased returns for less volume, but highlights his concerns surrounding liquidity.
“While the returns are going up we are thinking do we take the risks we are taking for not getting securities back when we need to get them back, do we feel comfortable now when we are transacting as we frequently find people who will not transact with us,” said Richard Hochreutiner director group treasury and head of global collateral at Swiss Re.
“We look at these things with great concern.”
A recent report from the International Securities Lending Association (ISLA) suggested that regulatory impacts could push institutional lenders away from the securities lending market and significantly affect liquidity.
The report stated that the combined and rolling impact of regulations such as the Securities Financing Transaction Regulation (SFTR), the Central Securities Depository Regulation (CSDR) and further restrictions on UCITS may cause some lenders to withdraw from the market rather than comply.
“The fact that we are having a panel entitled the future of securities financing implies that there will be one which is great news,” added Hochreutiner.
“Insurance companies have begun to benefit from distortions in the market as the amount of return you can generate by lending high quality assets into the market has gone up considerably so from our perspective it has been more return for less volume.
“At the same time as this increased return, not only on an absolute basis but relative to yields in government bonds, we are easily concerned about liquidity as it’s a big issue we have.”
Hochreutiner also stressed how minor changes necessary to particular structures, in particular the repo desk, would have a significant impact but are necessary.
“The concern is how the structure of the market is evaporating, there have been some promising signals to tweak some of the unintended consequences without changing the trends to become a more secure place,
“These tweaks can make a massive difference but we need to go there.
“Look at how desks are structured; for example we don’t just have the repo desk, the way the market has moved doesn’t have a very strong reason for existing on its own and has to become more of a collateral desk.”
Fellow panellist Paul Van de Moosdijk, senior treasurer at PGGM also spoke of issues that the repo market is facing particularly with “banks pulling away from the repo market by either lowering or removing their balance completely.”
Earlier this year Oscar Huettner, founder of Barclays Capital’s European repo desk and author of the ‘Global Approach to Collateral Management’ white paper released by Euroclear and DTCC joint venture GlobalCollateral, suggested that Basel III and Dodd Frank have caused the repo market to lose its ability as a liquidity provider.
A report authored by BNY Mellon earlier this year said that three-quarters of sovereign institutions have said they would increase their securities lending to boost global liquidity.
The poll of 24 sovereign firms found that 75% of sovereigns agree they “have a role to play in increasing liquidity”.