IMN: Heading to a non-cash environment
08 February 2019 Fort Lauderdale
Image: Shutterstock
Panellists at the IMN Beneficial Owners' International 兔子先生Finance & Collateral Management Conference in Fort Lauderdale predicted that the industry could be heading to a non-cash environment.
Patrick Morrissey, head of product, strategy, and implementation, securities lending at Vanguard Group, cited: 鈥淭he environment that we are moving into is seeing participants move into the non-cash space.鈥�
The moderator, Peter Bassler of eSecLending, said to panellists: 鈥淐ash versus non-cash, [at the conference] you heard that everyone wants to pledge non-cash on the borrower's side.鈥�
鈥淭he interesting thing for me is that the cash markets are giving you a great deal, you can make 20 to 30 basis points with your cash, but the borrowers want to give you non cash鈥攕o how do you balance that and what are you doing today in your programmes with the cash/non cash dynamic?鈥�
Dan Kiefer, Investment Manager, Opportunistic Credit, CalPERS, commented: 鈥淵ou have to do something with cash when you have a lot of it and sometimes yields aren't good. We run an intrinsic only programme so we weren't searching for cash yield and our balances would run between $20 to 24 million.鈥�
鈥淲hen we moved to non-cash it's about finding that table for a smaller cash balance, which gives you a lot more flexibility.鈥�
He continued: 鈥淭he other thing we noticed when we were bidding off our portfolios was that we weren't getting cash bids because it has become non-economic for a lot of bidders to give us cash bids.鈥�
Morrissey said: 鈥淎t Vanguard, we have specials on focus. As more participants lean towards the non-cash space, we are beginning to slowly see the environment we are heading into as being one where the very lowest rate securities are the ones which could become more commoditised by still trying to be a cash programme as opposed to the super specials securities.鈥�
鈥淚f you're going to be anything but a specials programme, you need to think about that kind of diversification in terms of whether you're going to take treasuries for collateral and what that looks and feels like.鈥�
He added: 鈥淏ut ultimately at the end of the day, we are seeing commoditisation of the very lowest rates securities by being in traditional cash class versus the other dynamic.鈥�
Morrissey then asked the panel: 鈥淲hat are the biggest challenges of getting the treasury management function?鈥�
One panellist replied: 鈥淭he idea of securities lending, while they understand risk and rewards, is not necessarily something that they understand on a deeper level, and so it鈥檚 about getting their attention on what the opportunity set looks like.鈥�
鈥淎 lot of this peer to peer action has been incredibly helpful. Once they understand what we鈥檙e talking about, the economics story will be easier to tell.鈥�
Patrick Morrissey, head of product, strategy, and implementation, securities lending at Vanguard Group, cited: 鈥淭he environment that we are moving into is seeing participants move into the non-cash space.鈥�
The moderator, Peter Bassler of eSecLending, said to panellists: 鈥淐ash versus non-cash, [at the conference] you heard that everyone wants to pledge non-cash on the borrower's side.鈥�
鈥淭he interesting thing for me is that the cash markets are giving you a great deal, you can make 20 to 30 basis points with your cash, but the borrowers want to give you non cash鈥攕o how do you balance that and what are you doing today in your programmes with the cash/non cash dynamic?鈥�
Dan Kiefer, Investment Manager, Opportunistic Credit, CalPERS, commented: 鈥淵ou have to do something with cash when you have a lot of it and sometimes yields aren't good. We run an intrinsic only programme so we weren't searching for cash yield and our balances would run between $20 to 24 million.鈥�
鈥淲hen we moved to non-cash it's about finding that table for a smaller cash balance, which gives you a lot more flexibility.鈥�
He continued: 鈥淭he other thing we noticed when we were bidding off our portfolios was that we weren't getting cash bids because it has become non-economic for a lot of bidders to give us cash bids.鈥�
Morrissey said: 鈥淎t Vanguard, we have specials on focus. As more participants lean towards the non-cash space, we are beginning to slowly see the environment we are heading into as being one where the very lowest rate securities are the ones which could become more commoditised by still trying to be a cash programme as opposed to the super specials securities.鈥�
鈥淚f you're going to be anything but a specials programme, you need to think about that kind of diversification in terms of whether you're going to take treasuries for collateral and what that looks and feels like.鈥�
He added: 鈥淏ut ultimately at the end of the day, we are seeing commoditisation of the very lowest rates securities by being in traditional cash class versus the other dynamic.鈥�
Morrissey then asked the panel: 鈥淲hat are the biggest challenges of getting the treasury management function?鈥�
One panellist replied: 鈥淭he idea of securities lending, while they understand risk and rewards, is not necessarily something that they understand on a deeper level, and so it鈥檚 about getting their attention on what the opportunity set looks like.鈥�
鈥淎 lot of this peer to peer action has been incredibly helpful. Once they understand what we鈥檙e talking about, the economics story will be easier to tell.鈥�
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