BNP Paribas wants clients to think about the intrinsic value of collateral David Raccat, head of market and financing services in Asia-Pacific for BNP Paribas Securities Services, does not mince his words when it comes to collateral management.

“Cash is trash,” he says. “Time has demonstrated that it might be more risky than other kinds of collateral.” In part, his comments refer back to the financial crisis when many lenders received a nasty shock when they discovered their cash collateral had been reinvested in instruments linked to US mortgages; their triple-A ratings didn’t stop them collapsing.

BNP Paribas Securities Services contrasts these shocks with the equity markets. While many lost more than half their value after September 2008, trading continued in almost all stocks. No risk model would assign a low risk status to equities, but continuous trading throughout the crisis at least proves liquidity risk is low.

Since then collateral management underwent some significant practical changes. Banks have to reinvest the cash, which brings back the questions of how to do so safely and for what level of return. Collateral management is no longer viewed as an isolated and reactive back-office function but as a key enabler for firms to mitigate their counterparty risks. 

Even more importantly, collateral is increasingly needed to meet daily liquidity and financing needs. Raccat’s argument for lending clients to look beyond general collateral (GC) simply reflects the current times. The latest ISLA numbers demonstrate that non-cash collateral – fixed income and equities – is on the rise. 

“There is a huge opportunity to carve out alpha,” he says. The other part of Raccat’s argument is very contemporary: “The trends we are seeing now in Asia Pacific we have already experienced in Europe. It is the banks rather than buy-side hedge funds that are driving lending right now,” he says. 

Specifically, the banking sector is in a predicament because of Basel III. The obligation to own high quality liquid assets is at odds with the commercial imperative to increase revenues. So, rather than have cash sitting as a liability on the balance sheet or re-investing in miserly GC, banks are prepared to look at the intrinsic value of equities and bonds as collateral that offers a positive yield.

Also, in line with the trend to loan out government bonds, BNP Paribas is taking all kinds of high–quality sovereign paper including JGBs and T-Bills into lending programmes.

There are plenty of local initiatives too. The bank is significantly increasing supply in Australia with major onboardings, where its agency lending business is on the rise. As a principal lender in Hong Kong, it is opening up new markets and increasing inventory. And it is currently looking at new markets such as Malaysia where banks want better access to securities lending.

“There was a tactical gap because of a lack of supply.” After an almost ten-year presence in Asia-Pacific, Raccat reports that BNP Paribas Securities Services is gaining in traction:“The name is more recognised and we have credibility for our unique product offering.”

This article appeared in Global Investor/ISF's Securities Finance Asia Pacific 2016 guide.