The building blocks for collateral transformations are coming into place as asset managers become more comfortable with taking corporate bonds and equities as collateral in securities lending trades, according to a new Finadium survey.

However, the demand for these trades simply isn’t yet robust enough to create the risk-adjusted return that asset managers would want to see in return for lending their securities.

Despite ongoing low lending fees, asset managers without legal prohibitions have broadened their non-cash collateral acceptance policies this year, the survey found.

An expansion into equities and lowering haircuts on corporate bonds were just two changes reported. Finadium said there was growing interest in collateral transformations where bonds would typically be lent in exchange for lower-quality equities.

The rise in equity interest also includes lending equities for equity collateral, the rationale being that they are typically liquid, if volatile. A margin of 110% is enough that lenders can feel secure even if the market were to fall, said Finadium.

For corporate bonds, asset managers said they were considering lower margins of between 105% and 108% , even if their previous guidelines had mandated 115%.

Some asset managers had hoped the more flexible non-cash collateral acceptance would result in a big increase in new borrowing. There has only so far been an incremental rise in borrowing demand, said Finadium.

Other funds said that moving beyond OECD government bonds to accept equities as collateral was not a "top level priority for their risk teams."

More than half (58%) of the funds surveyed, largely US mutual funds, accepted only cash as collateral and the 11% that accepted only non-cash were based in Europe.

Many of the remaining 31% respondents that accepted both forms of collateral believed it was the best option, although there were some reports that reinvestment of cash collateral was so poor that managers preferred non-cash collateral.

There was increased dialogue about the much-discussed yet elusive collateral transformation trade, which is “grinding to life”, particularly in Europe, according to the report.

European managers reported demand for collateral transformation trades but at a low premium relative to their standard securities lending trade. Borrower demand is not yet sufficient to push fees up to a level that managers would be happy to take.

In some instances, asset managers said that the question was not whether to receive government bonds or equities as collateral, but to accept equities or not do the loan at all. Finadium said this was a symptom of borrower pricing power, reflecting low demand for collateral in other parts of the financial system.