No bonanza yet for big funds from new rules to cut risk

Sun Jan 5, 2014 5:48am EST
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By Simon Jessop

LONDON (Reuters) - If pension funds, insurers and sovereign wealth funds were hoping to cash in on lending "high quality" assets to those scrambling to meet tougher collateral requirements in 2014, they are likely to be disappointed.

The phasing in of the U.S. Dodd-Frank Act and its European equivalent EMIR (European Markets Infrastructure Regulation) over the next 18 months is expected to boost demand for assets like top rated sovereign debt to back derivative trades.

But for all the industry warnings of a squeeze in supply -dismissed by regulators as a tactic to lobby for weaker rules - the amount of available collateral outstripped demand last year and things are unlikely to change much near term.

"People are still expecting this demand to come but there's plenty of supply at the moment and until that comes under pressure, fees won't rise appreciably," said David Lewis, senior vice president at Sungard's data firm, Astec Analytics.

If all derivative deals are forced to go through central clearing, where both parties would be asked to post collateral, some industry bodies have suggested it could lead to demand for new collateral of between $800 billion and $10 trillion.

Other new rules, also aimed at applying lessons from the 2007/09 financial crisis, will force banks to hold buffers of government debt to withstand shocks unaided.

That ought to be good news for the big funds, which tend to hold pools of such "safe", low-yielding assets and many of which welcome a chance to earn more by lending them out.

Sungard said stock lending rose around 15 percent last year. The volume of bonds borrowed rose 20 percent, but fees earned by those lending them did not rise.   Continued...

A trader reacts at his desk at the Frankfurt stock exchange August 19, 2011. REUTERS/Alex Domanski