An article in P&I today falls into the “what we always knew but still nice to see in the mainstream press” department. Institutional investors are engaging in repo and securities lending for liquidity funding purposes given incredibly low or even negative returns on cash investments.
The P&I article notes that “In addition to lengthening duration and marginally increasing risk, some investors are using repurchase agreements to add yield to their liquidity portfolios, sources said. In what’s known as a repo and reverse repo, securities including U.S. Treasuries or other government bonds are “loaned’ in return for a fee and collateral, which could include high-quality credit or other securities.”
The article does not go into the next part of the conversation – using these liquidity pools to self-fund instead of relying on bank credit lines. Finadium’s comments on liquidity management from an October 2010 report are here.
The Finadium press release from last year noted that “Liquidity risk management is evolving quickly, and it is capturing in its path not only banks and insurance companies but also asset managers, hedge funds and pension plans. As a group, asset holders are just now beginning to incorporate liquidity risk management techniques into their regulatory and internal reporting. They are also beginning to recognize the value that liquidity metrics add to their portfolio management, sales and client relationship management activities.”
Are repo and securities lending the next Foreign Exchange? A much-ignored asset class now becoming mainstream? Watch this space.
The original P&I article is here.