Data Explorers has published a research report which shows that US domiciled securities lenders are overwhelmingly focussed on cash as collateral, whilst many other jurisdictions have a propensity to accept non-cash collateral.
The report argues the predominance of non-cash, in particular liquid equities, collateral by lenders outside the US was instrumental in mitigating risk following the implosion of Lehman Brothers during the credit crunch.
“Collateral is an essential component of securities lending transactions. What one accepts and how it performs is of critical importance, especially when things go wrong, as in the case of Lehman,” says Mark Faulkner, founder and head of innovation, Data Explorers. “The extent to which US regulations continues to encourage a reliance on cash collateral will be a key theme covered at the New York Securities Financing Forum in May.”
The Data Explorers report, Accepting Equities as Collateral: The European Lenders’ Experience, was commissioned by the Risk Management Association and forms part of its submission to US regulators.
The report highlights the overwhelming reliance on cash collateral by US domiciled institutions. In January 2010 the percentage of collateral taken as cash in the US was 95 per cent. This contrasts heavily with other countries such as the UK, where cash accounts for only 21 per cent of collateral, and Canada, which has seen reliance on cash almost half to 20 per cent over a three year period.
“With investor protection at the forefront, US regulators such as the SEC (mutual funds) and the Department of Labor (pension funds) may wish to reflect on positive European experiences to ascertain the potential benefits of adopting international collateral practices,” adds Faulkner. “Cash remains an important component of collateral, but we believe it should form part of a balanced portfolio.”
Data Explorers believes these statistics owe a great deal to historical tax legislation and inertia, yet the predominance of non-cash collateral, such as equities, has served lenders outside the US well during the recent credit crunch.