Looking at liquidity
Global Investor interviewed John Templeton, Managing Director and Global Head of Securities Finance Sales and Relationship Management at BNY Mellon Markets, on liquidity.
This article is part of the 2023 Americas Securities Finance Guide, which can be accessed here.
What are the available routes for raising and deploying liquidity?
There is no shortage of routes available for a client to access liquidity – but not all are easy to access. At BNY Mellon, we have been focused on, and successful at finding solutions. For clients seeking to deploy cash liquidity, our market-leading LiquidityDirect platform provides access to a range of options, including deposits, money market funds, cleared repo, commercial paper, and certain securities.
Clients seeking to earn incremental returns on securities they own can participate in our lending programs with BNY Mellon acting in either an agency or a principal capacity. Our clients who use these services can focus on the key investment considerations that they have – yield, duration, capacity, and alignment to their risk guidelines – rather than on routes to execution. When raising liquidity, clients consider fundamentally the same factors. They balance rate, duration, size, operating model, and collateral guidelines as key factors and, again, simplicity of execution when looking to the repo, securities lending, synthetic, and credit markets for liquidity.
How do you assess the risks associated with liquidity routes, especially in challenging market conditions?
While seeking expanded routes to market, it is important to be conscious that each route has its own set of risks. The key to managing those risks is to have a consistent framework allowing for the monitoring of business, market, counterparty, operations and collateral/ investment risks. By having a consistent approach, clients are well-prepared to analyse the many options available to them, and select the ones that are best aligned to their needs. Most clients find that the best time to analyse these risks are in stable markets, rather than in times of high volatility. However, a key part of any analysis is the ability to retain access to liquidity in all markets.
How have clients utilised different liquidity routes during challenging market conditions? Can you provide examples of successful strategies?
Clients who have consistent success in raising/deploying liquidity in challenging markets have multiple routes to market, allowing them to access the solutions that match their investment, risk, and return guidelines. For example, a client may be invested into an asset where the fundamental value is dislocated temporarily from the market price. In that case, the client can still access liquidity from the asset by:
• Repoing out the securities, to raise cash
• Taking out a loan and using the securities as collateral
• Lending the securities and receiving cash collateral
• Exchanging the securities for another form of securities
• Posting the securities as collateral in an unrelated transaction
All of these routes to market effectively address the same underlying issue in different ways, and each requires resources in order to access it. While the routes to market are the same across our client base, each client has a distinct balance sheet, investment portfolio, and risk standards. All of these factors inform the decision for the client in which routes to pursue.
The decision point for most clients is how liquidity aligns to their overall goals, and whether they are solving for a tactical need (where speed to market is of the highest priority) vs. a strategic need (where having broader access is key to being able to navigate through disparate market conditions).
Have you noticed any trends or changes in the utilisation of specific liquidity routes? Can you name any?
The major change that we’ve seen is that clients are reacting to the increased volatility caused by recent macro events adopting wider sets of routes to market, and ensuring that they can deploy and raise liquidity as needed, regardless of the environment.
In the past four years, we have had three events disrupt markets significantly in the first quarter (COVID in 2020, the war in Ukraine in 2022, and the US regional bank crisis in 2023). Clients who had multiple routes available to them were able to invest with less disruption than clients who relied on specific, more limited, routes to market.
Another key change that we have seen from clients is an increased focus on optimisation of the assets used to raise liquidity. Many of our clients have the same asset pool for securities lending activity, meeting margin requirements for derivative trades, and raising cash in the repo market.
By working with BNY Mellon, clients are able to make sure that their assets with intrinsic lending value go out on loan, rather than being posted as collateral. Further, our technology examines their long assets and their collateral obligations, selecting the assets that best balance the clients’ goals of minimising the amount of collateral posted and accounting for the cost of carry of those assets, while meeting all of their obligations.
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