Dince its introduction, the securities lending activity, governed by Law No. 45-12 then amended by Law No. 83-20, has played a key role in the financial markets by offering investors opportunities to improve their performance. However, the lack of guarantees in certain transactions represented a significant risk for market participants.
With the amendment of the law in August 2021, which introduced the obligation to provide guarantees for any securities lending transaction, a new era has begun for this activity, marked by less lax regulation. Securities lending allows a lender to transfer full ownership of securities to a borrower, who agrees to return them for a fee. This market instrument provides great flexibility to investors, particularly institutional investors and banks.
However, it involves several risks, particularly that of counterparty, where one of the parties may not be able to return the securities or the promised guarantee. Before the amendment to Law 83-20, the majority of transactions were concluded without collateral, which increased these risks, especially in intra-group operations, such as between banks and UCITS of the same financial group. The August 2021 amendment introduced a major requirement: the obligation to provide security (collateral) for each securities lending transaction. This strengthening aims to protect lenders, by providing them with coverage in the event of default by counterparties. Accepted collateral includes cash, listed shares, Treasury Bills (BDT) and “Other Securities”.
However, the amendment provides for notable exceptions, allowing certain intra-group transactions and those carried out by market makers to take place without collateral. “Before the reform, the securities lending market looked a bit like a gray area. Some banks used this mechanism to refinance without collateral, and certain UCITS managed their ratios with complete discretion. We then found ourselves with extreme leverage and total opacity on loan pricing. I remind you that between the end of 2014 and the end of 2016, unsecured loans dominated and made the market vulnerable. It is precisely to remedy these excesses that the reform intervened,” reminds us a market professional.
A tangible impact on the market
The amendment fundamentally transformed the securities lending market. In 2023, securities lending operations reached a volume of 315 billion DH, up 4.6%. The outstanding amount of these operations recorded a significant increase of 67% year-on-year, with a volume of 34.3 billion DH. This figure reflects the rapid adaptation of players to new requirements and demonstrates the resilience of this activity, despite a stricter regulatory framework. The structure of loans has also evolved. Treasury bills (BDT) now represent the majority of securities lent, at 97.76% in 2023, compared to 96.13% in 2022.
This over-representation of BDTs highlights a growing preference for secure guarantees, particularly in a context of increased regulation. Private debt securities, on the other hand, saw their share reduced to 1.67% in 2023, down compared to previous years. “The August 2021 reform clearly provided additional security. The collateral obligation gave rise to a more rigorous selection of transactions, and above all did not slow down market dynamics, since the outstanding amount was 189 billion DH in 2021 compared to 315 billion DH in 2023,” comments our source. On the side of the main market players, lenders are prinmainly made up of UCITS, with a market share which increases from 84.85% in 2022 to 82.23% in 2023. They are followed by banks, which record an increase, going from a share of 14.39% in 2022 to 16.46% in 2023. On the borrower side, banks occupy the first position in 2023 and represent 43.3% of the volume of loans, against 34.68% in 2022.
In second position are UCITS, whose share fell from 34.27% in 2022 to 21.19% in 2023. Non-financial companies maintained their share of 19.89% in 2023 compared to 19. 79% in 2022. This is explained in particular by the need for security and the need to comply with new collateralization obligations. “I also consider that the exceptions provided for intra-group transactions or with market makers leave a certain flexibility, to maintain the fluidity of operations between entities of the same group, hence the increase in operations at certain banks as well” , he specifies. Another interesting indicator is the evolution of the average duration of BDT loans, which increased from 2.1 weeks in 2022 to 5.3 weeks in 2023.
A change which denotes a preference for longer commitments, which allow better optimization of the guarantees mobilized. Promising results, but necessary vigilance The collateralization obligation has therefore considerably reduced the risks for lenders and made the market more transparent. On the other hand, the share of transactions without collateral still increased, from 10.1% in 2022 to 14.9% in 2023, largely thanks to the exemptions provided for by law for certain intra-group transactions or with market makers. These operations, although seemingly less risky, must be closely monitored to avoid any accumulation of systemic risk.
“I also remind you that in February the regulator put out for public consultation a draft circular aimed at operationalizing the amendments made to law 45-12. This project clarifies the operating rules, the approval requirements for platforms, and also the reporting methods, which will undoubtedly help to further professionalize this market,” explains the asset management professional. Ultimately, the amendment to Law 83-20 has profoundly modified the securities lending activity, making it more secure, without slowing down its dynamics. Market players seem to have adapted quickly, and the volumes traded show good progress. However, in this new environment where security is reinforced, vigilance remains required to ensure that exceptions do not create new risks.
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