Funds' shadow-market lending buoys liquidity found to be susceptible to investor runs

21 February 2019 9:59am
Asset managers’ securities lending to hedge funds in the unregulated shadow market boosts off-exchange market liquidity that can be sapped by panicky investor redemptions, a global study said.

“We provide the first evidence that OTC market liquidity is vulnerable to run risks arising in the securities lending market, particularly in corporate bond securities lending by non-bank financial institutions,” a Bank for International Settlements working paper posted yesterday said.

The findings come as international authorities consider whether to push bond funds, insurers and pension funds to reduce leverage in the over-the-counter market. Shadow banking has been outpacing conventional lending, especially in emerging markets.