Cash-collateral reinvestment

Cash-collateral reinvestment is the process of taking the cash which is placed as collateral on the securities loaned, and reinvesting this cash in other financial-products or money markets to generate additional revenue. The reinvestment of cash collateral is performed by the lender, who accrues the interest on the value of the reinvestment. Securities lending is an almost universally profitable enterprise for investors, and this remained true even during the great contraction in late 2008. Cash-collateral reinvestment is an optional secondary activity which introduces additional risk to the lender. In the build-up to 2008, AIG used cash-collateral reinvestment as part of their securities lending programme. During the ensuing fallout, it transpired that AIG had reinvested their cash collateral into illiquid Mortgage Backed Securities. As a result, liquidity and financial risk rose to a level that threatened the survival of the institution itself, as well as wider financial stability. In this case, the consequence of an aggressive reinvestment strategy was that the cash no longer served as a form of risk mitigation but rather increased the risk the lender was exposing itself to. Cash-collateral reinvestment is an optional secondary activity which introduces additional risk to securities lending. The obvious way to eliminate this risk is to use non-cash collateral. At Sharegain se offer our clients complete non-cash collateral flexibility. Although we promote ESMA-defined HQLA (High Quality Liquid Assets) collateral schedule eligibility, clients can control and define the eligibility in accordance with their wishes and risk profile. For clients that prefer to use cash collateral, we adopt a conservative approach – refraining from reinvestment. Given the current environment this provides the opportunity to earn interest without exposure to further market reinvestment risks.