Clearstream’s Monthly Report

• Global securities financing faces structural changes
• Demand for collateral makes it more attractive to use multiple types of securities

The global securities financing business is undergoing structural changes. Negative interest rates affect the activities of market participants, while at the same time central bank funding predominates. However, the new scene opens opportunities for market infrastructure providers like Clearstream who offer products that meet the needs of banks, corporates and the buy side.

According to Philippe Seyll, Head of Global Securities Financing and Co-CEO of Clearstream Banking Luxembourg, the securities financing business of the future is a secured market in which market participants are increasingly deploying  multiple types of securities.

The greater demand for collateral – driven by the regulatory agenda – makes it more and more attractive to use multiple types of securities as collateral in repo transactions and other exposures. Therefore market participants are increasingly using their equities portfolio. Mandatory central clearing of certain derivatives plus more stringent capital ratios are increasing the need for high quality securities as collateral (HQLA). At the same time, central bank bond purchasing programmes such as the European Central Bank’s Public Sector Purchase Programme (PSPP) have further reduced the available amount of HQLA in the market. 

“In consequence, more and more market participants are including equities in their collateral eligibility schedules in addition to fixed income”, says Seyll. “Equities have certain advantages over fixed income: They are transparently priced and can be easily liquidated in the event of a default, either on-exchange or via a broker.” In addition, yield on equities can be higher than on fixed income collateral and customers can choose between a wide range of traded terms and currencies. “This shift towards equities is being hastened by the entry of the buy side into the secured funding market”, Seyll adds.

Currently, business conditions are still challenging, the outstanding volumes have declined. However, Seyll expects that the market will see some floor to that development once central bank policies go back to normal.

Business overview