Securities Lending Facility. Baudouin Richard Gemloc Peer Group Dialogue May 3, 2011

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Aubrie Marsha Thornton
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1 Securities Lending Facility Baudouin Richard Gemloc Peer Group Dialogue May 3, 2011

2 Outline 1. Securities Lending (SL) Definition Objectives Instruments 2. Securities Lending Facility (SLF) Definition Kinds 3. Special Lending Facility extended by a DMOs to its PDs Putting a SLF in place Prerequisites Main practical decisions to be made 4. Conclusion 2

3 Securities Lending Definition A market participant borrows a security for a certain period Objectives for the securities borrower to avoid a delivery fail to cover a short position to create a short position for the securities lender to increase the return on his securities portfolio 3

4 Securities Lending Instruments Straight loan (collateralized) securities lender is remunerated by a commission (cash amount) Repo (cash collateral) securities lender is remunerated by an interest rate margin (percent differential) Simultaneous repo and reverse repo (cash neutral) securities lender is remunerated by an interest rate margin (percent differential) 4

5 Repo Interest Rate Margin SPOT Securities borrower security cash Securities lender FORWARD Securities borrower cash security Securities lender The borrower has deposited funds with the lender The commission of the lender is an interest rate below market Who takes the initiative of the transaction? If securities borrower securities borrowing = special collateral If securities lender collateralized cash borrowing = general collateral 5

6 Securities Lending Facility Definition Special mechanism put in place to facilitate SL By contrast: bilateral SL = ad hoc agreement between securities borrower and lender Four Kinds of SLF Automatic SLF provided by Clearing House (CH) SLF provided by Central Bank Special SLF provided by DMO for its PDs Hybrid system provided by DMO and CH 6

7 Automatic SLF by the Clearing House Objective to avoid delivery fails Sometimes referred to as optional lending, compulsory borrowing Mechanism Participants in the CH authorize the CH to lend securities on their behalf At the closing of clearing, CH lends securities overnight when needed to avoid a delivery fail Procedure Typically, loan of securities overnight with pledge of collateral & commission split between lender & CH Drawback Availability of needed security is not guaranteed Relatively complex to put in place 7

8 Special SLF Granted by DMO to PDs Main Objective: to help PDs comply with their market making obligation Specific Features Guaranteed availability of securities Surplus of securities kept in portfolio Temporary creation of securities Flexible terms some transaction terms are tailor made (e.g., amount and maturity) One constraint SLF should be used by PDs as a last resort penalty rate vs. OTC market One potential concern to avoid fueling speculation by facilitating short positions 8

9 Hybrid System = cooperation DMO / Clearing House DMO supports ASLF extended by CH DMO keeps a securities account with CH The account is provisioned with: larger auctioned amounts or temporary creation of securities 9

10 Special SLF Granted by DMO to PDs Prerequisites for putting SLF in place Legal Authority to issue securities for lending purposes Master Agreement Technical Temporary creation of securities Principal practical decisions to be made SLF manager: DMO or agent Lending instrument Collateral: type and remuneration Loaned Securities: which ones, how many, how long 10

11 Practices in Mature Markets Select Countries with DMO-Provided SLFs AUSTRALIA BELGIUM DENMARK ICELAND NETHERLANDS UK Agent RBA PDs only? No Yes Yes Yes Yes Yes Instrument CMRRR repo CMRRR Securities collat. loan Securities Any GS Any GS subject to quoting obligation & some RLTM req. Security source RBA portfolio TC + TC (tbc) Max. global amount Maturity Collateral remuneration Collateral margin Dollar 5 bn Overnight RO ok DMO margin 300 bp Euro 500 mn per maturity Overnight RO : max 20 DMO margin Min. 25 bp On the run Benchmark GS portfolio + TC ( tbc) Bonds : DK 4 bn Bills : DK 10 bn 1 to 5 working days DMO margin 20 bp bonds; 15 bp bills Any T. Bill & T.bond Repo or CMRRR at PD s option T.bond only TC Up to making the size of a bond series = Euro 10 bn 28 days Up to next auction Max. one month DMO margin 20 bp 2 % * % * 2 Between 2 & 7 % Function of maturity DMO margin Min 25 bp CMRRR Any non-rump GS TC Overnight Max 2 weeks 5 % Acronyms : CMRRR: cash matched repo & reverse repo; GS: government securities; RLTM: remaining life to maturity; RO: roll over; TC: temporary creation. 11

12 Practices in Emerging Markets Select Countries with DMO-provided SLFs BRAZIL HUNGARY MALAYSIA MEXICO SOUTH AFRICA TURKEY Agent SARB - PDs only? No No Yes Yes Yes (TBC) Yes Instrument Cash matched repo 1-week repo Repo Collateralized straight loan Securities FiR, FlR, and IL ZC, FiR, and IL bonds bonds Security source Max. global amount CB portfolio Total amount in 6- mo. repo Discount bench. T- bills and GS subject to RLTM req. DMO s own account. HUF 79 bn for 2011 (adjusted annually) Scripless GS with min. outs. amount of RM 1 mn. Repo (TBC) FiR and IL bonds Collateralized loan (TBC) Benchmark GS BNM holdings DMO portfolio TC Lending bank; TC As per BNM holdings (?) 4 % per issue, 2 % of total issues None 5 % of total bench. GS issuance Max. maturity 6 mo. 1 week 1 mo. 1 bus. day. RO ok Overnight 1 wk, 2 wks; 1 mo. and 3 mo. Collateral remuneration Collateral margin 6 mo. repo rate as determined by the auction Haircut HUF cash Premium = WRGF * factor Haircut; depends on GS maturity Negotiated btwn parties Collateral 102% of loaned GS + premium to CH 0 % Fee determined by CB 120 % of net amount of transaction Acronyms: CMR: cash matched repo; GS: government securities; RLTM: remaining life to maturity; RO: roll over; TC: temporary creation; FiR: fixed rate; FlR: floating rate; IL: inflation linked; ZC: zero-coupon; WRGF: weighted rate of government funding; CH = clearing house. 12

13 Conclusion A SLF extended by DMO to its PDs Enhances the liquidity of the secondary market Is a technical initiative that raises minimal risks for the government Transactions are for small amounts and for short term Procedure can be adapted by DMO any time and at its discretion Counterparts = PDs Is an increasingly widespread practice Temporary creation of securities 13

14 THANK YOU! Website:

Securities Lending and Related Standing Facilities Background Note

Public Disclosure Authorized Public Disclosure Authorized GLOBAL FINANCE & MARKETS GOVERNMENT BOND MARKETS ADVISORY SERVICES Securities Lending and Related Standing Facilities Background Note May 2015