Securities Lending Facility Baudouin Richard Gemloc Peer Group - - PowerPoint PPT Presentation

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Securities Lending Facility Baudouin Richard Gemloc Peer Group - - PowerPoint PPT Presentation

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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

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Securities Lending Facility

Baudouin Richard Gemloc Peer Group Dialogue April 26, 2011

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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
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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

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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 lender

security cash

SPOT

Securities borrower Securities lender

security 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

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

  • e.g., Mexico; India?
  • 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 of 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 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 Euro 10 bn per maturity

  • Max. 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 Max 25 bp DMO margin 20 bp bonds; 15 bp bills DMO margin 20 bp DMO margin Max 25 bp Collateral margin 2 % * 2 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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Peer Group Country Practices

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
  • f 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 %

  • f 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

  • n 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.

Countries with DMO-provided SLFs

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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

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THANK YOU!

Website: www.gemloc.org Email: gemlocta@worldbank.org

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