Banking regulation Basel III could breathe new life into the securities lending sector, market participants claimed yesterday at a forum in London.
Heads of securities lending teams from some of the world’s largest custodian banks cited items under the Basel III framework that could mean more supply and demand for the practice.
The panel was discussing where future revenue in the sector was likely to flow from at a conference hosted by market monitor Data Explorers in London. Panel members, who were discussing the issue on a ‘non-attributable’ basis, included the heads of securities lending of BNY Mellon, BNP Paribas, Societe Generale, RBC Dexia and RBS.
Revenues in the sector were reduced significantly during the financial crisis as asset owners – usually large institutional investors – were concerned about counterparty risk and hedging activity, which makes up a large part of borrowers’ usage, was curbed by international regulators.
One of the panellists said terms in the Basel III regulation, which aimed to make banks safer, had provided new avenues for the securities lending sector.
He said: “In the rules on leverage and capital ratio the same good news keeps coming up: corporate bonds are eligible as high quality collateral under the rules. So, for a beneficial owner, Basel III gives demand for my customers’ corporate bonds like never before. My clients are prepared to explore new trades and some of the regulations are helpful.”
Another panellist said corporate bonds that were rated AA- or above would be considered 100% liquid, unlike equities.
The panel said the topic of collateral was pertinent for fund managers of, and investors in, UCITS funds, which require holdings to be incredibly liquid.
One panellist said: “Risk appetite in the beneficial owner world is being adjusted to look at different collateral so some greater flexibility from clients is coming.”
Reporting by Elizabeth Pfeuti, European editor, aiCIO, an Asset International publication