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Magazine Issues » December 2020

Securities finance roundtable: Time for the tin hats?

Funds Europe – The Bank of England notes in its May ‘Financial Stability Report’ how a sharp contraction in risk appetite at the start of the crisis translated into a ‘flight for safety’, then a ‘dash for cash’. How well did your liquidity management procedures stand up to this stress?

Bouthors – We needed to adapt to the particular circumstances of this crisis, but we have managed our way through it. The industry was forced to adjust, at short notice, to full remote working. The organisation was already well equipped to work from home, so we only experienced small IT-related issues . We responded quickly and made available the resources needed to make this transition. We identified similar flexibility from many of our counterparties. It was impressive to see the industry adjust so quickly to managing large asset portfolios from a home working environment.

Specifically, for the liquidity management function, we previously centralised all our collateralisation activity in one system. We have one team managing collateral movements within the group and this has been important for optimising our collateral inventory and allocating this efficiently across securities lending, financing, OTC derivatives margining and other needs.

Meaden – On the repo side of our business, we have not seen the acute liquidity squeezes this year that we have witnessed in the past. With intervention from the Federal Reserve and other G7 central banks, liquidity has been abundant. However, this has had negative implications for pricing through our repo desk. Repo rates spiked in March during the early days of the crisis, but then narrowed dramatically following the central bank interventions. Overnight sterling went negative at the last quarter end, which hasn’t happened for some time.

Dyson – There is excess liquidity currently, but it will be interesting to see how this plays out around the year-end. This can create a squeeze on funding as banks reduce their balance sheets in preparing for their year-end reporting.

Chessum – We manage close to £60 billion in cash for ASI money market and liquidity funds through our desk and it is clear that this year-end is going to be tough. Counterparties are pulling balance sheet already and trying to ensure that we are prepared. This year-end may be the most difficult we have seen for a number of years.

Nobody wants to take cash at the moment and it is difficult to pick up any sort of yield from cash deposits or reverse repo. It is a challenge to find a home for this cash – and to ensure we adhere to investment guidelines and have the right sort of diversification for each of the underlying investments. T-bills are already trading negative in the market…

Meaden – We have had enquiries asking, ‘Can your systems handle negative rates?’

Chessum – The euro has been negative for some time, so as an industry we know we can work with negative interest rates. But there is always concern that changing one symbol in front of the currency can trigger an error in an IT system. This needs to be tested thoroughly before handling this in a live environment.

A broader reflection on this discussion is that central banks are pumping large amounts of liquidity into the markets and this has been important to offset the stress conditions developing early in the year. However, this is having a negative impact on savings – on work-based savings and household savings – as interest rates are kept artificially low by these huge central bank liquidity injections. Markets need to find their natural ebb and flow, but they are unable to do so currently since you can’t fight the central banks…