Sec Lending: Risk Appetite Rising in Collateral Reinvestment

A Finadium survey found asset managers are warming up to the idea of reinvesting cash collateral outside of the low-yielding government bond-backed repo market.

(August 7, 2013) – Asset managers are cautiously opening up to a range of asset classes for securities lending cash collateral reinvestments, according to a survey by research and consulting firm Finadium.

“As investors look at what they might want to put their cash collateral in order to make a positive return, repo [repurchase agreements] backed by corporate bonds and equities are one alternative,” Finadium’s Managing Principal Josh Galper told aiCIO.

The survey found that 68% of asset managers believed repos backed by corporate bonds or equities were an acceptable cash collateral investment option.

However, while higher yields have compelled managers to explore cash collateral reinvestment options beyond overnight government bonds, loan duration remained a sticking point.

Less than half (47%) of respondents said they felt loans over 30 days were a good idea.

“Rates are always better for those assets with more than a 30-day term,” Galper pointed out. “The reason for that is that assets over 30 days will not show up in the books of a bank for its liquidity coverage ratio when structured correctly...There is more risk to the investor: liquidity risk, liquidation risk, and more volatility than in the government overnight bond market, of course. On the other hand, the question really is, how much are investors compensated for that risk?” 

Investors’ compensation for engaging in securities lending has dropped below pre-financial crisis levels, the report said, and most expect this downward trend to continue.

As revenues have dropped, however, managers’ comfort level with the practice has climbed. Furthermore, according to Galper, “the sense that securities lending is an important revenue source appears to have increased.”

Finadium’s report was based on interviews with 39 asset management professionals who represented an aggregate $18.9 trillion in capital.

Related Content:Securities Lending Survey

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