LONDON Oct 11 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
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
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
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)