Repo markets and the proposed financial transaction taxThe European Commission’s financial transaction tax proposal on most equity, debt and derivative transactions is currently the subject of hot debate and negotiations between the 11 eurozone member states and participants in the financial markets. One area of the industry that seems particularly vulnerable to even the smallest levy is the securities lending and repo markets because of a combination of low margins, large volumes and repeated transactions. Janus Henderson Investors | 23.05.2013 12:50 Uhr
Securities lending involves a transfer of shares or bonds to another party (the borrower) who will give the lender collateral in the form of cash, bonds or shares. The borrower will pay the lender a fee periodically for the loan and will return the securities upon demand or at maturity. The process acts as a source of income for the lenders, typically pension funds and insurance companies, while it assists borrowers such as hedge funds, investment banks and other brokerages in their short selling, hedging and settlement activities among others.
Given that collateral is essential for the efficiency and stability of financial systems, there needs to be a market in which it can be priced, mobilised and moved efficiently around the system. While increased regulations on how collateral is employed are a welcome move, the current proposals make for an uncertain future for the securities lending market, which could shrink, at a time when regulators are proposing higher levels of collateral for derivative transactions — ie, more securities lending.
*Repo: a repurchase agreement where the seller of a security agrees to buy it back from a buyer at a later specified date.