The past year has proven a complicated one in the securities lending market. This has prompted central banks and other official institutions to seek out specialist securities lenders with a reputation not just for coping but also for thriving in unusual times. A name often at the top of their lists is BNP Paribas Securities Services.
After the US subprime and eurozone sovereign bond crises, lawmakers and regulators have pushed financial institutions to increase their holdings of safe assets. In particular, Basel III's 100% liquidity coverage ratio (LCR) led to a rush in demand. Financial institutions bought or borrowed large amounts of low-risk assets by the end of 2014 to meet the 100% LCR when it was first fully enforced in 2015.
Demand for high-quality liquid assets has remained relatively high. But strict securities lender guidelines can make it difficult for central banks that want to loan out their securities. New activities by the European Central Bank (ECB), meanwhile, have further complicated matters.
Since April 2015, securities purchased under the auspices of the ECB's public sector purchase programme (PSPP) have been made available to eurozone central banks for what the ECB calls "securities lending in a decentralised manner". Some eurozone central banks have also loaned out securities bought under one of the ECB's covered bond purchase programmes (CBPPs). And from July 2016, six eurozone central banks have done the same with instruments bought as part of the corporate sector purchase programme.
Some market participants have found that the combined effects of the PSPP and the Basel III Accord – which remains the subject of tough negotiations among members of the Basel Committee on Banking Supervision – have led the supply of high-quality liquid assets to fall below demand. Others say that the demand for high-quality liquid assets has fluctuated throughout the year, going quiet over the summer, but rising in the last quarter of 2016.
Positive spreads can still be made, but one has to dial up the credit risk or extend duration
John Arnesen, BNP Paribas Securities Services
The securities services team at BNP Paribas has risen above these difficulties, growing its portfolio by around 30% in 2016. The team's global agency lending programme totalled €207 billion ($220.4 billion) of lendable assets as of November 30, 2016, and had €45 billion out on loan by the end of May 2016.
John Arnesen, global head of agency lending at BNP Paribas Securities Services, says achieving a positive spread through the reinvestment of cash collateral for securities is "increasingly difficult" because of the greater risk required: "Positive spreads can still be made, but one has to dial up the credit risk or extend duration."
One of the strengths of BNP Paribas Security Services is the range of roles it plays. As a custodian, it held a total of €8.521 trillion of assets under its control at the end of September 2016. And it also provides custody and clearing services across the world to a large number of major broker dealers, asset managers and asset owners.
As a result, many brokerage firms can borrow securities from the securities services team and settle them internally across their accounts with BNP Paribas. The team also often offers financing for brokers, allowing them to provide liquidity needed for trades.
Perhaps the major advantage of the BNP Paribas Securities Services team is its market coverage, one of the bank's clients says. The National Bank of Austria (OeNB) uses BNP Paribas for some of its lending programmes. For the past three years, the French bank has provided services for lending out securities held on the OeNB's books, with an annual value of more than €1 billion. After succeeding in a rigorous tendering programme, the team has spent the last year working on the OeNB's loans of eurozone securities purchased under the PSPP and the CBPP.
BNP Paribas was able to achieve positive spreads despite difficult market conditions, says Harald Müller of the OeNB. The Securities Services team's breadth of contacts also meant they were able to protect other market participants against settlement fails by providing bonds even at short notice, Müller says. The BNP Paribas team puts great emphasis on its risk management approach, noting that no client of the global agency lending programme has yet suffered a loss.
Gregory Ley, who manages the investment team at the Oxfordshire Pension Fund, also praises BNP Paribas's ability to get positive returns. In the past two years, the French bank achieved a return on the UK county council pension fund's securities loan transactions 50% higher than that of the previous contract holder, Ley says.
Lending the securities purchased under the PSPP was also considerably more complex than doing so for the Austrian central bank's own holdings, Müller noted. Loans of PSPP instruments have to follow special ECB rules that do not always match the current needs of the market. The BNP Paribas team had coped well with these requests, Müller says.
BNP Paribas's securities lending team draws strong praise for its approach to client relations from a number of its customers. Monthly reports to the Oxfordshire Pension Fund were "very good", Ley notes. The securities lending team provided "all the information we asked for" about collateral and returns, he adds.
The securities lending market is a difficult one for lenders to make a profit in: a situation that may well continue. But the record of the BNP Paribas team shows that in such a market, a firm with broad contacts and the ability to handle complex demands can prosper – and can help its institutional clients prosper, too.