In a closed-door roundtable discussion in Amsterdam, European market participants discussed the potential benefits of adopting pledge early, highlighting that initial uptake has been positive.

BNY Mellon went live with pledge in 2018 and, since then,  a number of borrowers and a high percentage of its lender base has signed up to it, noted Steve Kiely, the bank’s international head of securities finance sales and relationship management.

“We decided to get ahead of ISLA because we felt demand was occurring ahead of the publication of the standard document,” Kiely said, noting that BNY Mellon’s approach “has been very successful”.

“Pledge has been in the US for years and years, so anyone trading under a Master Securities Loan Agreement (MSLA) will be very used to a form of pledge structure anyway. People think that this is new, but it isn’t. Both internal and external counsel looked at this long and hard and we are satisfied that it is comparable to title transfer,” he added.

Simon Heath, JP Morgan’s managing director of securities finance trading, stated that he has also seen a positive reaction to pledge, noting that JP Morgan has a “a number of beneficial owners who approve this structure which is key to sustaining liquidity”.

The JP Morgan executive added: “Similarly to CCPs, you need sufficient participation to make the model work. We’ve been making sure that both sides, pledge and CCPs, are progressing.”

However, despite the positive response, Heath underlined that 2019 was “more challenging” in terms of revenue than binding constraints, but added that pledge also has not been “re-priced dramatically” when compared to a title transfer, although that is “likely a factor of business cycle”.

On the other hand, Raymond Blokland, Benelux consulting lead at Pierpoint Financial Consulting, claimed that “pledge is not a new phenomenon”, and said: “I don’t think pledge in essence is a particularly secure solution.

“When a major event happens can you actually get your collateral? I had these conversations years ago, pledge was always quite a difficult product and legal experts back then were not comfortable with it.”

Roelof Van De Struik, investment manager at PGGM, echoed Blokland’s concerns, citing that PGGM chose not to adopt pledge and instead opted for the CCP route. The rationale behind the decision was because he views pledge as “an unintended consequence of the balance sheet constraints, and I am not quite sure how long this will last”.

“We have a pretty simple mantra at PGGM and that is: if you add complexity, you really have to explain why. Pledge is adding complexity with a whole bunch of legal documents which vary depending on the jurisdiction you’re in,” he explained. “Beyond that, it becomes a little messy, especially with stay protocols. With title transfer it’s a lot easier proven technology. The only real investments I should be making are structural investments in good plumbing for the company. With the CCP route, once we get it right that’s a big innovation and a powerful product which I am looking forward to building out further.”

Van De Struik noted that European regulators want to see more investment in CCPs, but this strategy is also “an easier sell” to his clients. However, this is not his only concern. “Trying to figure out how solid pledge is and how it will react in times of extreme stress isn’t something we have experience with. I haven’t seen it work, so for me it’s not that easy to get my head around it,” he explained.

Whereas Xavier Bouthors, senior portfolio manager of treasury fixed income solutions at NN Investment Partners, highlighted a demand from counterparties for the use of pledge, adding that they have some borrowing clients who will only borrow from them if they are doing pledge.

“Borrowers get the benefit on the balance sheet side. I’m not saying that we shouldn't do pledge, but it seems like the turnaround on the buy-side is less efficient than it is on the sell-side,” Bouthors noted.

Heath observed that the take-up of pledge has been across the board, ranging from sovereigns to pensions funds and other types of beneficial owners. “There has been no one stand out type of client adopting the structure. Obviously, where there are considerations such as UCITSs rules, we haven’t seen much of a shift.”

BNY Mellon’s Kiely underlined that “as soon as” the bank went live with pledge, the first borrower took another $1 billion dollars of balance from the bank, and highlighted that this transaction was not a switch from transfer to pledge, but rather an increase, with the client willing to pay up to 10 basis points more for pledge.

This is an extract from Global Investor’s European Securities Finance Roundtable, held in Amsterdam in September. The discussion features in the December/January edition of Global Investor magazine, which can be accessed by clicking here.