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BoE’s Hauser 'optimistic' on securities lending
08 April 2014
Andrew Hauser of the UK central bank quashes four myths about the future of securities finance
Bank of England
The future of securities finance looks bright despite
concerns about low demand and returns, according to Andrew
Hauser, head of Sterling Markets Division, Bank of England, who
also chairs the Securities Lending and Repo Committee.
Speaking at JP Morgan’s Collateral Management and
Securities Financing Forum in London on March 27, Hauser
was optimistic about the ability of the industry to survive. He
dispelled four myths about the future of the industry, the
first being that regulators and central banks wanted to destroy
the repo and securities lending markets.
"Far from trying to kill the securities financing markets,
central banks need them to thrive – but in a safer and
more reliable way than they did pre-crisis."
The second myth was that there would be a collateral crunch due
to a rise in demand for high-quality collateral to meet new
regulatory requirements. Hauser cited a 2013 study by the Bank
for International Settlements that predicted demand for
high-quality collateral would rise by $4trn as a result of
liquidity regulation and margin requirements for clearing OTC
"That figure, though huge in absolute terms, is much smaller
than measures of global supply. The supply of AAA- and AA-
rated government bonds, for example, has risen by over $11trn
since 2007; the stock of non-cash collateral eligible for
derivatives transactions is some $50trn; and the major central
banks have transformed more than $4trn of collateral (some high
quality, some less so) into the most liquid asset of all
– central bank reserves – through their
quantitative easing programmes."
However, he said that if a global crunch is "far-fetched",
localised crunches in specific asset classes or markets may not
Limits around the flow of collateral have arguably caused
greater concern, as suggested in a new report by
Icma’s European Repo Council. Such barriers
include collateral locked up in entities such as central
counterparties (CCPs), funds that cannot or do not wish to lend
securities, and operational rigidities posed by systems
barriers or national borders.
Hauser said that while these are "real issues", it is difficult
to quantify their significance without "much better data" on
the sources of demand and supply in the whole system.
He said it is a misconception that it is entirely up to public
authorities to remove barriers to collateral fluidity. Public
authorities such as central banks must "certainly must do what
we can in areas within our control, both domestically and
working in international partnership". Indeed, the Bank of
England has taken steps to extend the range of collateral
eligible for its lending facilities.
However, Hauser said that most of the solutions to improving
collateral fluidity will come from the market, particularly the
"Market solutions of course require investment, and investment
requires an expectation of making a decent return. I recognise
that such returns may be relatively few and far between in
current market conditions. But I don’t believe
that means the price mechanism will never work.
"As and when a more substantial imbalance between demand and
supply of collateral does develop, as monetary policy
normalises and financial market activity recovers, that will be
reflected in a rising price of the relevant collateral. And
that in turn will induce in greater collateral supply, and more
investment and innovation in private sector solutions to