Securities lending allows holders of bonds or shares to transfer these financial assets temporarily to a counterparty, which agrees to return them on a future date. The counterparty that borrows the securities transfers other bonds, shares or cash to the lender as collateral and pays a fee.
There are several reasons for holding securities temporarily: borrowing securities for a limited period of time is often less costly, faster, and less risky than actually purchasing them outright.
With the launch of the Asset Purchase Programme (APP) and the acquisition of large volumes of public and private sector securities, there has been a gradual reduction in the availability of these kinds of securities on the market (the scarcity effect). The Eurosystem central banks have therefore stepped up their securities lending activities – which are an essential part of the asset purchase programmes that support overall liquidity in the market.
Securities lending has proved useful in allowing market operators to hold specific securities temporarily in order to limit unsettled trades and alleviate tensions when securities are scarce, thus helping to reduce the cost of acquiring good quality collateral.
Depending on market conditions, the Bank of Italy can lend securities it has previously purchased under the various monetary policy programmes (PEPP, PSPP, CSPP, SMP and CBPP). Currently the Bank is actively lending government securities, corporate bonds and covered bank bonds.
The service was launched in 2015 and initially offered by the Bank of Italy exclusively via the main international central securities depositories (ICSDs), Clearstream Luxembourg and Euroclear Bank. Each depository adopts its own operating procedures within the framework of the strategic guidelines drawn up by the Bank of Italy and in accordance with those indicated by the Eurosystem.
Starting on 15 July 2019, the Bank of Italy has been lending government securities (purchased under the PEPP, PSPP and SMP) directly to market counterparties. Lending can take place on the MTS Repo platform, following registration with the Italian central counterparty Cassa di compensazione e garanzia (CC&G), or bilaterally (‘over the counter’). With the latter, the Bank also offers securities lending for other euro-area government bonds pertaining to non-monetary policy portfolios. In order to preserve cash neutrality (no changes to the amount of cash in circulation), combined repo and reverse repo operations are carried out. Under certain market conditions, securities may be lent without making a cash reinvestment.
According to Eurosystem harmonised pricing principles, transactions are executed in line with market rates and, in any case, the minimum negotiable spread between the special repo rate and the general collateral repo rate would be determined by market conditions.
Bilateral transactions are governed by the GMRA or EMA contract instructions. The duration of the transactions, in line with prevailing market practice, can be between one day and one week.
The Bank of Italy is committed to providing this service effectively so as to ensure that the market functions smoothly and to reduce the cost to operators of borrowing high-quality securities. In this regard, the Bank of Italy reserves the right to apply mitigation measures against risks deriving from trading activities (e.g. absolute limits on the amount of securities that can be lent or on the duration of the operations, counterparty limits, etc.).
The list of the ISIN codes relating to securities available for loan is usually updated on Tuesdays after 3 p.m. (see the link at the foot of the page).
On the third Tuesday of the month following the reference month, the ECB publishes the aggregate figure of the monthly average of all securities lent by the Eurosystem and of the cash accepted as collateral.