SECURITIES LENDING & REPO MARKETS

A CACEIS PRODUCT DEVELOPMENT PUBLICATION - OCTOBER 2010

OVERVIEW OF THE SECURITIES FINANCING MARKETS

1.2.

Brief history 5

The repo and securities lending business, which really developed in the United States in the 1960s before spreading into Europe in the 1980s, has expanded rapidly in the last two decades, being now a 24-hour global activity. This sub-section relates the history of securities lending and repo markets from the 19th century until today. Figure 10 displays the main events which formed the industry across time.

Figure 10: Evolution of securities lending and repo markets across time

19th century and first half of the 20th

The 2000s before the financial crisis

2007-2010

1960s &1970s

1980s &1990s

Growth of emerging markets,

Fund raising The development of securities lending and repo markets

The globalisation of securities lending and repo markets

The credit crunch and the Lehman collapse

development of new transaction types and arrangements

Early stages

TIMELINE MAIN EVENTS

Development of an active inter-dealer market in stock loans in the US in the 1960s Development of a financing market in US treasury bonds in the US in the 1960s 1st cross-border or international sec. lending transactions in the 1970s US custodian banks began securities lending programs in the 1970s The US treasury bond repo market becomes a key part of the money market in the 1970s

Development of modern repo in the US in the 1980s

Repo adopted by Eurosystem as a key instrument

Beginning of securities lending in the 19th century

Subprime crisis in August 2007

Depository /

Central admin

Importation of repos into Europe by US investment banks during the 1980s Sharp increase of sec.lending volumes, supported by hedging and trading strategies Removal of many regulatory, tax and structural barriers to sec. lending throughout the world in the 1990s

Rising hedge fund industry and prime brokerage arrangements

Creation of the 1st developed repo market in the US in 1918

Lehman collapse in September 2008

Short-selling restrictions put in place by many regulators worldwide

Growth of sec. lending emerging markets

Rapid growth of the European repo market

Asian crisis in 1997

Repo-related events Securities lending-related events Events impacting both repo & securities lending

Launch of the euro in 1999

Copyright CACEIS, 2010

6 Source: Euroclear , “Understanding repos and the repo markets”, March 2009 Global Custodian , “Collateral: Securities Lending, Repo, OTC Derivatives and the Future of Finance”, 2007 Spitafields Advisors , “An intro- duction to Securities Lending”, Third edition, 2006 IOSCO , “Securities lending trans- actions: Market development and implications”, July 1999

1.2.1

Early stages of securities lending and repo markets

Securities lending began with the development of securities trading markets and can be traced back to the 19th century in the United Kingdom, where specialist intermediaries sourced gilts for the jobbers or market makers. Collateral, typically non-cash, passed be- tween the parties at the end of the trading day and offered protection for the lenders. A two- tier market quickly emerged: A security specific or “special” market and a more generic financing or “general” market. Repos were introduced later on, with the first developed repo market created by the US Federal Reserve in 1918, to give effect to the Federal Reserve’s open market operations.

page 18 | Securities Lending & Repo markets