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Sovereign investors look to securities lending to boost returns
October 11, 2016 / 3:51 PM / a year ago

Sovereign investors look to securities lending to boost returns

LONDON, Oct 11 (Reuters) - Three-quarters of sovereign investors are willing to allocate more of their balance sheets to lending out securities, potentially improving liquidity in global financial markets, a survey showed on Tuesday.

The survey, carried out by BNY Mellon and the Official Monetary and Financial Institutions Forum (OMFIF) from April to July 2016, found that respondents, including sovereign wealth funds and central banks, were looking at securities lending as a way to improve returns in a low-income world.

Institutional investors can earn a fee for lending out stocks or other securities to borrowers such as hedge funds that want to sell those securities short.

That in turn can inject liquidity into markets, helping to compensate for the reduction in banks’ market-making since the financial crisis.

The survey did not show how many of the 25 sovereign investors who participated are now lending securities - not all of them answered a question on their activity.

But it said about 75 percent were interested in increasing their securities lending, whether they were now lending them or not, and some 70 percent expected to earn an additional five to eight basis points from lending.

A quarter of the respondents said they did not now lend securities.

Together, the participants held assets of more than $4.7 trillion - equivalent to more than 16 percent of total assets at sovereign institutions worldwide.

Although the majority of the respondents said they would earmark only 10 to 15 percent of their balance sheets for securities lending, some said they would consider as much as 60 percent.

The survey highlighted this as a positive, saying: “Securities lending is one way in which sovereign investors could ‘rent’ their balance sheet to financial intermediaries at low cost, enabling greater market making.”

Nearly 65 percent of respondents expected liquidity to tighten in the next 12 to 24 months, citing the impact of regulations and central bank policies.

Under new rules such as Basel III, investment banks must hold large amounts of liquid assets, raising funding costs and reducing risk appetite and market-making activities. Loose central bank policies, low interest rates and asset purchase programmes have also contributed to lower liquidity.

“The central banks’ bond-buying programmes have contributed to a global shortage of safe assets just when the demand for such assets has become voracious,” said John Plender, the chairman of OMFIF.

While some sovereign institutions are investing only in the most liquid assets, 65 percent of the survey respondents said the pursuit of higher yields had become more important to their fund in the current low interest-rate environment, making them keen to diversify.

Some 67 percent of the survey’s respondents were central banks, 20 percent were pension funds and 13 percent were sovereign wealth funds. (Reporting by Claire Milhench, editing by Larry King)

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