Securities Lending Facility Baudouin Richard Gemloc Peer Group Dialogue April 26, 2011
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
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
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
Repo Interest Rate Margin SPOT security Securities borrower Securities lender cash FORWARD cash Securities borrower Securities lender security • 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
Securities Lending Facility Definition • Special mechanism put in place to facilitate SL • By contrast: bilateral SL = “ad hoc” agreement between securities borrower and lender Kinds of SLF “Automatic SLF” provided by Clearing House (CH) provided by Central Bank SLF provided by DMO for its PDs Special SLF provided by DMO and CH Hybrid system 6
Automatic SLF by the Clearing House • e.g., Mexico; India? • 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
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
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
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
Practices of 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. Repo or CMRRR CMRRR loan at PD’s option Securities Any GS Any GS subject On the run Any T. Bill & T.bond only Any non-rump GS to some RLTM req. Benchmark GS T.bond Security source RBA portfolio TC portfolio TC TC + TC (tbc) + TC ( tbc) Max. global Dollar 5 bn Euro 500 mn per Bonds : DK 4 bn Euro 10 bn per amount maturity Bills : DK 10 bn maturity Max. maturity Overnight Overnight 1 to 5 working 28 days Up to next auction Overnight RO ok RO : max 20 days Max. one month Max 2 weeks Collateral DMO margin DMO margin DMO margin DMO margin DMO margin remuneration 300 bp Max 25 bp 20 bp bonds; 20 bp Max 25 bp 15 bp bills Collateral 2 % * 2 0 2.5% * 2 Between 2 & 7 % 5 % margin Function of maturity Acronyms : CMRRR: cash matched repo & reverse repo; GS: government securities; RLTM: remaining life to maturity; RO: roll over; TC: temporary creation. 11
Peer Group Country Practices 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 Repo (TBC) Collateralized loan straight loan (TBC) Securities FiR, FlR, and IL Discount bench. T- Scripless GS with ZC, FiR, and IL FiR and IL bonds Benchmark GS bonds bills and GS subject min. outs. amount bonds to RLTM req. of RM 1 mn. Security CB portfolio DMO’s own BNM holdings DMO portfolio TC Lending bank; TC source account. Max. global Total amount in 6- HUF 79 bn for 2011 As per BNM 4 % per issue, 2 % None 5 % of total bench. amount mo. repo (adjusted annually) holdings (?) of total issues GS issuance Max. maturity 1 week 1 mo. 1 bus. day. RO ok Overnight 1 wk, 2 wks; 1 mo. 6 mo. and 3 mo. Collateral 0 % Fee determined by 6 mo. repo rate as HUF cash Premium = WRGF * remuneration CB determined by the factor auction Collateral Haircut Haircut; depends Negotiated btwn Collateral ≥ 102% of 120 % of net margin on GS maturity parties loaned GS + amount of premium to CH 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
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
THANK YOU! Website: www.gemloc.org Email: gemlocta@worldbank.org 14
More recommend
