securities lending facility - world...
TRANSCRIPT
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
3
Definition
Securities Lending
• A market participant borrows a security for a certain period
• for the securities borrower
– to avoid a delivery fail
– to cover a short position
– to create a short position
Objectives
• for the securities lender
– to increase the return on his securities portfolio
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)
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Repo Interest Rate
Margin
• The borrower has deposited funds with the lender
• The commission of the lender is an interest rate below market
Securities borrower Securities lendersecurity
cash
SPOT
Securities borrower Securities lendersecurity
cash
FORWARD
Who takes the initiative of the transaction?
• If securities borrower securities borrowing = “special collateral”
• If securities lender collateralized cash borrowing = “general collateral”
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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
Clearing House (CH)“Automatic SLF” provided by
SLF
Special SLF
Hybrid system
provided by
provided by
provided by
Central Bank
DMO for its PDs
DMO and CH
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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
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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
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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
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Special SLF Granted
by DMO to PDs
Prerequisites for putting SLF in place
Principal practical decisions to be made
• Legal
– Authority to issue securities for lending purposes
– Master Agreement
• Technical
– Temporary creation of securities
• SLF manager: DMO or agent
• Lending instrument
• Collateral: type and remuneration
• Loaned Securities: which ones, how many, how long
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Practices in
Mature Markets
AUSTRALIA BELGIUM DENMARK ICELAND NETHERLANDS UK
Agent RBA - - - - -
PDs only ? No Yes Yes Yes Yes Yes
Instrument CMRRR repo CMRRR Securities collat.
loan
Repo or CMRRR
at PD’s option
CMRRR
Securities Any GS Any GS subject to
quoting obligation
& some RLTM req.
On the run
Benchmark GS
Any T. Bill &
T.bond
T.bond only Any non-rump GS
Security source RBA portfolio
+ TC (tbc)
TC portfolio
+ TC ( tbc)
TC TC
Max. global amount
Dollar 5 bn Euro 500 mn per
maturity
Bonds : DK 4 bn
Bills : DK 10 bn
Up to making the
size of a bond
series = Euro 10 bn
Maturity Overnight
RO ok
Overnight
RO : max 20
1 to 5 working
days
28 days Up to next auction
Max. one month
Overnight
Max 2 weeks
Collateral remuneration
DMO margin
300 bp
DMO margin
Min. 25 bp
DMO margin
20 bp bonds;
15 bp bills
DMO margin
20 bp
DMO margin
Min 25 bp
Collateral margin
2 % * 2 0 2.5% * 2 Between 2 & 7 %
Function of
maturity
5 %
Acronyms : CMRRR: cash matched repo & reverse repo; GS: government securities; RLTM: remaining life to maturity;
RO: roll over; TC: temporary creation.
Select Countries with DMO-Provided SLFs
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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
Repo (TBC) Collateralized loan
(TBC)
Securities FiR, FlR, and IL
bonds
Discount bench. T-
bills and GS subject
to RLTM req.
Scripless GS with
min. outs. amount
of RM 1 mn.
ZC, FiR, and IL
bonds
FiR and IL bonds Benchmark GS
Security source
CB portfolio DMO’s own
account.
BNM holdings DMO portfolio TC Lending bank; TC
Max. global amount
Total amount in 6-
mo. repo
HUF 79 bn for 2011
(adjusted annually)
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
6 mo. repo rate as
determined by the
auction
HUF cash Premium = WRGF *
factor
0 % Fee determined by CB
Collateral margin
Haircut Haircut; depends
on GS maturity
Negotiated btwn
parties
Collateral ≥ 102% of
loaned GS +
premium to CH
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.
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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
