Securities lending

General features

Securities lending allows holders of bonds or shares to temporarily transfer these financial assets to a counterparty, which agrees to return them at a future date. The counterparty that borrows the securities transfers other bonds, shares or cash to the lender as collateral and pays a fee.

The Eurosystem's programme

With the launch of the asset purchase programme (APP) and the purchase 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 (scarcity effect). The Eurosystem central banks have therefore stepped up their securities lending activities - which are an essential complement to the asset purchase programmes.

The aim of the Eurosystem's securities lending programme is to support bond and repo market liquidity without unduly curtailing normal market activity. The Eurosystem primarily targets market participants with market-making obligations and continuously monitors securities lending so as to ensure its effectiveness. According to a harmonized approach adopted at Eurosystem level, transactions are negotiated at conditions consistent with the backstop role of the securities lending facility and, in any case, defined in such a way as not to alter the normal functioning of the market.

On the third Tuesday of the month following the reference month, the ECB publishes the aggregate monthly average figure of all securities lent out and of cash accepted as collateral by the Eurosystem.

Depending on market conditions, the Bank of Italy stands ready to lend the securities purchased under the various monetary policy programmes introduced over time (PEPP, PSPP, CSPP, SMP and CBPP).

Currently, the Bank is lending government securities, covered bank bonds and, as for corporate bonds, only those that meet the Eurosystem's minimum credit quality requirement.

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 also been lending government securities (purchased under the PEPP, PSPP and SMP) directly to market counterparties. Transactions can be carried out on the MTS Repo platform through the central counterparty Euronext Clearing (formerly Cassa di Compensazione e Garanzia - CC&G) or on a bilateral basis ('over the counter'). The same procedure applies to the securities lending activity that the Bank carries out on euro-area government securities (other than BTPs) that are held in investment portfolios. In order not to alter the liquidity in circulation (cash neutrality principle), combined repo and reverse repo transactions are carried out; under certain market conditions it is possible to lend the security without reinvesting the cash obtained as collateral.

Bilateral transactions are governed by the GMRA or EMA contract templates. 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.).

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.

The list of the ISIN codes relating to securities available for lending is usually made available by the Bank of Italy on Tuesdays after 3 p.m. (see the link at the foot of the page).