Non-cash collateral on the rise in US
Using non-cash collateral to borrow US equities has become increasingly prevalent and now stands at an all-time high, according to Markit.
The aggregate value of non-cash collateralised US equity loans has jumped more than fivefold since 2009, surging from $20bn to an all-time high of $118bn in 2015. Non-cash loans make up 29% of the total US equity value on loan, up from 7% at the start of 2009.
"Loans for US equities have historically been overwhelmingly tilted towards cash-securitised loans. But the recent wave of balance sheet regulation has heralded the increased use of non-cash collateral in the seven years since the financial crisis," said Simon Colvin, research analyst at Markit.
Non US beneficial owners have better capitalised on the trend, as they have been more willing to adapt to regulatory developments and negotiate more pragmatic collateral terms.
Three-quarters (75%) of US equity loans from non-US beneficial owners are against non-cash collateral.
"Lenders which are best able to adapt to regulatory developments stand to see a strong demand for their assets," said Simon Colvin, research analyst at Markit.
"The willingness of non US beneficial owners to accept non-cash collateral has seen the aggregate value of US equity loans from these beneficial owners jump by 40% over the last 12 months."
As Basel III and other capital regulation drives general collateral balances out of favour, the increased cost of balance sheet will encourage borrowers to ration high-cost collateral and favour lenders which are willing to negotiate more pragmatic collateral terms.
US-domiciled beneficial owners, which are less able to accept non-cash collateral, utilisation of US equities has fallen to an all-time low 4.5% recently, down from 6% three years ago and much lower than non-US domiciled beneficial owners, which have over 6.5% of their US equity out on loan.
While non-cash collateralised loans have surged in popularity over the last few years, the value of the relatively less capital efficient cash-collateralised loans has remained relatively flat at $280bn since the start of 2009, representing "a massive atrophy in real terms" given the recent strong market run.
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