Sovereign institutions look to increase sec lending to boost liquidity

BNY Mellon report found strong appetite for sovereigns to increase securities lending activities to grow returns and increase liquidity.

By Hayley McDowell

Three-quarters of sovereign institutions have said they would increase their securities lending to boost global liquidity, according to a report authored by BNY Mellon.

The poll of 24 sovereign firms found that 75% of sovereigns agree they “have a role to play in increasing liquidity”. 

A significant 75% of sovereigns were willing to allocate between 10% and 15% of their balance sheets for securities lending, with some reporting they would consider allocating up to 60%.

Brian Ruane, CEO of BNY Mellon’s broker-dealer services business, said an increase in sovereign fund participation in securities lending “could compensate somewhat for the reduction in market-making activities by banks and broker-dealers.”

Regulations like Basel II have raised the cost of activities like securities lending for banks and dealers, as central banks have contributed to a reduction in liquidity through low interest rates, the report explained.

Hani Kablawi, head of investment services for EMEA at BNY Mellon, added that besides sovereigns viewing this as an opportunity to grow returns and reduce costs, “[they] see themselves as having the ability to mitigate some of the threat to global liquidity that market participants are facing.”

The report suggested that sovereigns looking to increase their capital markets roles must become more connected with key market participants like custody banks, CCPs and tri-party repo providers.