* Regulation-fuelled "collateral crunch" not seen in 2014
* Fees to borrow government debt fell in 2013 - Sungard
* Basel III bank capital rules crimp collateral demand
By Simon Jessop
LONDON, Jan 5 If pension funds, insurers and
sovereign wealth funds were hoping to cash in on lending "high
quality" assets to those scrambling to meet tougher collateral
requirements in 2014, they are likely to be disappointed.
The phasing in of the U.S. Dodd-Frank Act and its European
equivalent EMIR (European Markets Infrastructure Regulation)
over the next 18 months is expected to boost demand for assets
like top rated sovereign debt to back derivative trades.
But for all the industry warnings of a squeeze in supply
-dismissed by regulators as a tactic to lobby for weaker rules -
the amount of available collateral outstripped demand last year
and things are unlikely to change much near term.
"People are still expecting this demand to come but there's
plenty of supply at the moment and until that comes under
pressure, fees won't rise appreciably," said David Lewis, senior
vice president at Sungard's data firm, Astec Analytics.
If all derivative deals are forced to go through central
clearing, where both parties would be asked to post collateral,
some industry bodies have suggested it could lead to demand for
new collateral of between $800 billion and $10 trillion.
Other new rules, also aimed at applying lessons from the
2007/09 financial crisis, will force banks to hold buffers of
government debt to withstand shocks unaided.
That ought to be good news for the big funds, which tend to
hold pools of such "safe", low-yielding assets and many of which
welcome a chance to earn more by lending them out.
Sungard said stock lending rose around 15 percent last year.
The volume of bonds borrowed rose 20 percent, but fees earned by
those lending them did not rise.
"If anything, we saw returns from government bond lending
drop a little bit. The average return from a global bond lending
programme is around 15 basis points (bps), so it's not a massive
revenue earner yet."
Assets on loan are worth around $1.8 trillion globally and
are roughly split 40:60 between bonds and equities, although the
value on loan rises sharply during the dividend season.
Most bonds are borrowed for collateral or to help manage
financing operations at banks, while stocks are mostly lent for
market making or to proprietary traders such as hedge funds
betting on a price fall.
Low-fee assets of below 20 bps - mostly high quality debt
borrowed for a short time - make up around 80 percent of total
lending by volume, while the top-earning deals - sometimes in
the hundreds of basis points - are largely from stock lending.
While U.S. derivatives clearing is already being phased in,
the introduction of Europe's equivalent EMIR rules will take
longer and some suggest it could take several years for the full
impact to be felt on collateral demand in Europe.
"We believe it will take a few years after all the
initiatives are in place before you start to see some stress on
eligible collateral," said Nadine Chakar, head of product and
strategy for BNY Mellon's Global Collateral Services business.
At the same time, while regulations such as Basel III have
led to a slight increase in demand from banks to "optimise"
their balance sheets - typically swapping higher-quality bonds
for their lower-quality assets - reduced post-crisis trading
levels and heavy bond supply are acting to keep fees in check.
During the most recent earnings season, Europe's leading
investment banks all saw a slide in trade revenue as volumes
fell, particularly in fixed income, currencies and commodities,
helping to put a lid on collateral demand.
"For all the anticipated demand for HQLAs (high quality
liquid assets), it is not really being reflected in the price
the sell-side is prepared to pay," said Mick Chadwick, head of
trading for the securities lending business at Aviva Investors,
which manages around 250 billion pounds ($410.95 billion) of
The fee demanded by a lender varies according to a variety
of factors, including asset quality and how long the borrower
wants the asset for. For a trade involving safe-haven German
debt, the typical price could be under 10 bps.
A meaningful spike from that level is unlikely in 2014 as
long-term holders look to capture as much additional yield as
possible in a world of low central bank interest rates.
"Beneficial owners have a positive desire for securities
lending to help generate incremental returns. The challenge is
on the demand side," said Paul Wilson, global head of agent
lending products at JPMorgan, citing the impact of macro
economic activity by central banks, rising equity markets and
the impact of new capital rules.
The new Basel III bank capital rules are prompting lenders
to "deleverage" or rein back risky activities - which require
more collateral - in order to reduce the overall need for
While there were some reasons to think demand may increase,
for example from hedge funds adding leverage to engage in
short-selling, it will likely be moderate, Wilson said.
"The outlook is a little bit more positive than it was in
2013, but I don't see 2014 as a knockout year."
($1 = 0.6084 British pounds)
(Reporting by Simon Jessop; additional reporting by Huw Jones;
editing by Philippa Fletcher)