MinutesItem 1 - Bank of England Introductory remarks and minutes from
The Chair welcomed new Committee member Devi
The Chair welcomed Sara Almosawi, Andy Hill, Alexander
Westphal, Joana Barata, Shikha Kalra, Victoria Robbins and Charlie
Watson as part of the Bank’s initiative to make such meetings more
diverse and inclusive.
The Chair confirmed that the minutes of
the February 2021 meeting were published on the Bank of England’s
The Committee had no comments to raise on the
minutes from February’s meeting. Item 2 - Recent market trends and
The Chair introduced a discussion on recent
market conditions and trends. It was noted that the first quarter of
2021 has been notable for the securities lending market with increased
volatility in February during the fixed income sell-off, the S&P;
reaching new highs and increasing revenues as a result.
Members discussed how the events of the first quarter have
impacted securities financing revenue. For the repo market, the first
quarter events had little impact on profit and loss (P&L;), with the
main driver in this being special repo trades, particularly in the US
and Hong Kong. The Committee noted General Collateral (GC) lending
rates are further decreasing given the current low interest rate
environment. Spreads more generally are thin and the Committee noted
the securities lending market as a whole is being squeezed in terms of
rates and revenue.
Turning to equities, during 2020
participants positioned in outright directional trades were tending to
perform well. Committee members had observed a change in behaviour in
equities driven by the sizing in crowded short trades. The Committee
discussed if hedging these types of trades had added additional
volatility to the market. There was agreement that the squeeze on
spreads in markets is leading to an increase in securities lending
balances, particularly in fixed income and equities, as the market is
seeking out returns.
Looking further ahead in 2021, the
Committee discussed possible events which might widen spreads in the
market. SLR not being rolled in the US in March was thought to have
had an impact, and may have reduced available balance sheet size. The
Euro area equivalent to SLR is due to happen in June and is thought it
could have a similar impact. For fixed income in particular, expected
rate rises in markets will aid widening spreads. Item 3 - Future
Landscape – Retail trading activity (Gamestop), Archegos
Committee continued a previous discussion from the February meeting on
the events involving GameStop and discussed any lessons learnt from
both the Gamestop and Archegos episodes. In summary, a number of
retail traders had targeted concentrated hedge fund short positions,
leading to a dramatic increase in the share price of GameStop during
January ($19 to $350).
For hedge fund
short-sellers – danger of crowded shorts and increased market power of
For securities lenders – specials lending
entails concentrated, idiosyncratic risk that needs to be managed.
Archegos defaulted on a number of margin calls with prime-
brokers who had material and
concentrated exposures, leading to
a fire-sale of holdings by a number of prime-brokers.
Committee reflected on the two events, with the main focus on firms’
risk processes and in particular whether adequate haircut and margin
levels were applied. It also questioned whether if exposure to
collateral delivered by counterparties was sufficiently diversified.
Prime Brokers have accepted lower revenues and have taken lower
collateral margins/less liquid collateral in the battle to gain market
share for hedge fund business. It was highlighted one of the
differences between losses of prime brokers in the Archegos event was
the speed with which some of the prime brokers were able to liquidate
positions compared to others. Speed to market was felt to be a large
factor that impacted the liquidity of collateral held and should have
implications for how lenders view the risk of pledge collateral versus
For prime brokers –
aggregate risk matters, remedy grace periods for Events of Default
need to be reviewed, low margin trades do not compensate for tail risk
(>$10bn in industry losses associated with Archegos).
lenders – for certain trades (funding leveraged equity positions) the
only effective hedge may be more collateral (from media reports the
average shortfall for liquidating Archegos collateral was
28%)…”industry standard” haircuts are insufficient for this type of
The discussion turned to the whether it was really
possible to set appropriate haircut levels which were appropriate for
stressed markets across different jurisdictions. A particular
challenge was felt to be when valuations are based on UK end of day
pricing but the US market is still trading. If there was a major US
price move, UK loans may not be appropriately collateralised. One
possible solution to the margining issue suggested was to move to
using CCP’s to clear business, as this would ensure standard and real
time valuations and margining, although it would not deal with the
time differential issue (use of CCPs would also mean out-sourcing risk
management and reduce diversification of collateral).
debated possible solutions to the issues around collateral
concentration; it was noted that in a situation like Archegos it can
be difficult to see how large the exposure to one firm can be. The
Committee noted the difficulty given the lack of transparency in
reporting by some types of counterparties. One possible solution
discussed was for triparty agents to be required to set limits on
collateral holdings rather than just counterparty specific limits.
The Committee discussed the role regulators should play
following the recent events and it was felt that the regulators
already had a role identifying if there is a systemic risk. The
inconsistency in the reporting across jurisdictions was highlighted.
Item 4 - Environmental, Social and Corporate Governance (ESG) in
Securities Lending Markets
The Chair opened the discussion on
ESG with a particular focus on the role of tri-party agents in
facilitating ESG collateral lending and in being in tune with
beneficial owners policies.
It was felt that there is still
much work to do in this space to enable this to happen. Members noted
there are only two ESG indexes, and this lack of options creates
challenges in being able to overlay an investment portfolio with an
ESG measurement. This also presents challenges if you want to make any
changes to collateral parameters as it will need to be completed at an
individual level, rather than at the tri-party level. The Committee
discussed how a common approach to ESG collateral schedules would make
it easier to apply, and how helpful it would be if these were to come
from tri-parties. It was noted there are currently no market standards
for ESG, which could have an adverse impact on smaller lenders who may
not have the ability to create bespoke schedules. Members agreed
standardisation in ESG collateral schedules would be welcomed. Item 5
- UK Money Markets Code
The Bank of England confirmed the
updated Money Markets Code was published on the 21st April 2021. The
Bank thanked the Committee for their assistance in updating the
securities lending section of the Code and noted the main updates in
the Code were on Diversity and Inclusion, ESG policies, working away
from the usual location, and electronification of markets.
Members noted the updates made to the Code had been well
received and it would be interesting to particularly see how Diversity
and Inclusion (D&I;) updates are added into future practices. Item 6 -
Diversity and Inclusion on Securities Lending Markets
invited any updates or thoughts for future meetings regarding D&I. ;
Members welcomed the enhancement on D&I; in the Money Markets
Code and noted where the Codes comment on working from home has helped
with thinking for firms future plans.
Members noted the Bank’s
Meeting Varied People event on the 21st April 2021was an excellent
event which was well received. They would welcome comments from the
Bank on how it continue to keep the momentum from the event going. The
Bank noted the next steps will be to follow up with attendees on how
to join the Bank’s market intelligence gathering function. Item 7 -
No further business was raised by the committee.
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