European 兔子先生Lending Panel
10 June 2025
Industry experts look at the trends, opportunities, regulations, and potential impact of the T+1 cycle on securities lending facing the Continent
Image: stock.adobe.com/ioanna_alexa
How do you assess the performance of European securities lending markets over the past 12 months?
Ross Bowman: As the Greek philosopher Heraclitus famously said: 鈥淭here is nothing permanent, except change.鈥� The securities lending market is no exception. Along with global capital markets reacting to breaking news on trade deals on a daily basis, ever-changing macro-conditions make for difficult year-over-year (YoY) securities lending performance comparisons.
At a simple 鈥榥umbers鈥� level, reviewing performance is straight-forward, but the factors influencing the numbers are changeable and constantly evolving. Looking at the European equity securities lending market, revenues have progressively declined YoY. Although mergers and acquisitions (M&A) activity in 2024 did increase over 2023, 2025 has proved to be a slow starter. M&A and directional market investor conviction are large contributing factors to securities lending performance. Consequently, when these elements are absent or in decline, lenders focus on comparative performance trends, encompassing collateral flexibility, trade structures (term versus. overnight) and peer-group comparisons, to determine overall levels of programme performance, focusing on programme optimisation rather than the YoY revenue delta itself.
European government bonds remain in high demand, although downward pressure on fees has increased, as a result of borrowers becoming more efficient at managing balance sheet costs, adopting alternative trades structures to source supply (such as swaps), while seeking longer term trades, to replace overnight and shorter-dated term supply.
Zoe Long: US trade policy and geopolitical developments will continue to shape market direction and influence central bank policy. While the recent tariff-induced volatility was relatively short lived, prevailing uncertainty nevertheless means that risk remains. 听
In the Middle East and North Africa (MENA) region, there continues to be an acceleration of demand for specific names, which presents potential opportunities for the rest of the year and into 2026, while we anticipate opportunities in continental Europe, particularly in the context of European bank mergers and acquisitions, especially in Italy which has fuelled performance.
More broadly, we continue to expect counterparties to remain acutely focused on financial resource management, with binding constraints driving trading decisions. Accessing supply from capital-efficient sources of liquidity will remain central as will funding long inventory via collateral transformation and reverse repo to generate liquidity coverage ratio (LCR) and net stable funding ratio (NSFR), in turn providing opportunities to drive alpha across various parts of the book.
Joseph Gillingwater: 兔子先生lending markets have had a lot to contend with over the past 12 months, as stubborn inflationary pressures prolonged global higher-for-longer interest rate narratives, while geopolitical pressures added to uncertainty.听Fixed income demand and revenue remained healthy with collateral upgrade trades continuing to be well sought. Indeed, equity valuations continued to rise after the US elections, with the Republican administration expected to be softer on bank regulation. This rally resulted in added funding pressures over year-end with banks having to contend with global systemically important banks (G-SIB) score pressures. In short, this increased the demand for highly rated core European sovereign issuance.
Equity lending flows declined as elevated stock valuations meant investors remained heavily skewed to the long side. General collateral and hard-to-borrow volumes were impacted as a result, with revenues pressured for much of the period. However, activity rebounded in the first quarter of 2025 with significant market turbulence driven by uncertainty over the direction of US trade policy. President Trump鈥檚 announcement of reciprocal tariffs on 2 April triggered a sharp equity sell-off and spike in volatility, resulting in more concentrated borrowing demand.听
In which European markets, both by jurisdiction and asset class, do you identify the strongest opportunities for growth of your lending business?
Long: Given a number of headwinds across Europe, the Middle East and Africa (EMEA), which have clearly impacted industry revenues and relative performance over the past two years, it has become increasingly important to both broaden and evolve the product in order to continue to drive alpha and diversify revenue streams.
The MENA region is a current focal point in the securities lending market. A growing number of hedge funds have established operations in Saudi Arabia, aiding the development of a fully functioning capital market with both funding and short selling key to liquidity depth and supporting derivatives markets. We see the Gulf Cooperation Council (GCC) region as a key opportunity, and continue to build out our Saudi footprint both in terms of asset depth and diversity, client base, and counterparty breadth, while maintaining a keen focus on collateral and our financing capabilities as we look forward.
Within Turkey there was clear engagement and activity from a securities lending perspective throughout Q1, although flows remained somewhat constrained. Despite political tensions, the short sell ban remains under review and, if lifted, we anticipate further opportunities on the back of positioning to deploy liquidity and drive returns for our client base.
Elsewhere, market volatility driven by macroeconomic pressures has led investors to gravitate towards the safety of bonds. Despite Moody鈥檚 downgrade of the US credit rating, sovereign bonds have demonstrated remarkable resiliency throughout tariff-induced turbulence, especially in the backdrop of increased importance of capitally efficient borrowing. While short positioning across the evergreen space has decreased, lending performance has remained strong, driven more from the funding side where institutions remain focused on upgrading collateral into high-quality liquid assets (HQLA) within LCR compliant structures.
Bowman: 2024 witnessed a substantial year-on-year growth of investor inflows into European exchange traded funds (ETFs). Although its flexibility, simplicity, and relatively low cost of investment make it an asset class of choice in Europe today, the overall size of the ETF market is much smaller than that of the cash equity and fixed income markets. With collective investment vehicles, such as UCITS funds, representing around 18 per cent of global on loan balances, and consequently an even larger percentage of available market inventory, the launch and expansion of ETFs by UCITS funds supports this growth potential, as demand in the lending market to borrower ETFs and the underlying securities of the ETF could potentially provide additional securities lending performance returns for investors.
What pressures and opportunities have recent regulatory initiatives created for your securities lending business?听
Rickie Smith: Recent regulatory initiatives such as Basel III capital rules, the Central 兔子先生Depositories Regulation (CSDR), and the move toward T+1 accelerated settlement have created both significant pressures and compelling opportunities for our securities lending business.
The pressures are clear 鈥� Basel III鈥檚 capital and liquidity requirements have prompted many counterparties to reassess the economics of their lending and borrowing strategies, making balance sheet efficiency more critical than ever. At the same time, CSDR鈥檚 settlement discipline regime has heightened the operational stakes, demanding greater precision and timeliness to avoid penalties and maintain client trust. The shift to T+1 in key markets is compounding these challenges by tightening operational timelines and reducing the margin for error across the trade lifecycle.
But these changes are also driving innovation. We have been proactive in investing in automation, real-time data infrastructure, and smarter optimisation to support more agile, compliant, and cost-effective lending. These upgrades not only mitigate regulatory risks, but also enhance the client experience by improving transparency, settlement efficiency, and return optimisation.
Overall, while the regulatory trajectory demands more from us operationally, it is also reinforcing our strategic role in helping clients navigate an increasingly complex market landscape with confidence and agility.
Gillingwater: Like recent years, regulation has continued to shape the wider industry, with the new US administration expected to ease the regulatory burden on banks. This could lead to some dislocation versus international peers, potentially disadvantaging non-US banks most active in international markets. Most of the focus remains on the Basel III Endgame, and clarity on whether the Trump administration will alter the Basel rules or even mark the 鈥楨ndgame for Endgame鈥�.
While delayed for 12 months, the US 兔子先生and Exchange Commission鈥檚 (SEC鈥檚) mandatory clearing rules require significant attention and staffing resources. 兔子先生lending transactions are out of scope, though cash reinvestment desks partaking in US Treasury repo transactions will need to ensure full documentation is in place for compliance in June 2027.
Lastly, settlement efficiency remains a key theme after Canada and the US successfully adopted the move to an accelerated T+1 settlement cycle in May 2024. In contrast with prior concerns around settlement discipline, the relatively smooth North American process paves the way for other markets to adopt the same measures, with Europe and the United Kingdom confirmed to transition in October 2027, benefitting from 鈥榮econd-mover advantage鈥�.听
The UK, Europe, and Switzerland are in alignment when it comes to T+1, with a confirmed implementation date of 11 October 2027. What investments and adaptations will your firm need to make to be T+1 ready? What role will automation play in this?
Bowman: Each market participant will have its own process and technological needs with respect to the adaptation of its business in accommodating T+1 settlement in the UK, Europe, and Switzerland. The securities lending market has already adopted T+1 settlement in the US last year, with valuable lessons learnt, by each firm, from that experience. However, the complexity of Europe鈥檚 many markets, multiple currencies, numerous central securities depositories (CSDs), etc., will create three main challenges.
The first will be the internal changes firms will need to make to their current processes, either manual or with automation. The second will be the alignment and agreement of 鈥榤arket standard鈥� practices and guidelines so the interconnectedness across the lending market and participating firms is minimally disrupted. The third will be related to the scale in adoption of automated matching platforms to minimise manual processes, under the restricted settlement timeframe.
T+1 industry taskforces and the International 兔子先生Lending Association (ISLA) are keeping market participants 鈥榦n point鈥� with the second challenge, but, as we saw with the move to T+1 in the US equity market, adoption of automated platform solutions appeared not to be widespread, creating process fragmentation across the industry, that was typically backfilled with manual solutions; processes that may well still be in place today. Having an effective strategy and a detailed development and investment plan in place, well in advance of the implementation of the regulation, supported by a mindset of open engagement with the wider industry, will be a critical component to the success of a smooth transition for any business.
Smith: The move to T+1 settlement is more than just a compression of timelines, it is a fundamental shift in market infrastructure that demands front-to-back integration, speed, and accuracy. For our firm, it is a catalyst to accelerate strategic investments we have already been making in automation, data quality, and exception management.
As the industry develops new best practices to address the regulatory changes, our focus from a development point of view is twofold. First, we are investing in real-time processing capabilities across the full trade lifecycle, improving data integrity across systems and counterparties which will be imperative in ensuring our readiness. Second, we are working closely with our technology partners and internal teams to ensure our operating model is lean, resilient, and capable of straight-through processing wherever possible.
Automation will play a pivotal role 鈥� not just in meeting the compressed timelines, but in transforming how we operate long term. By automating manual touchpoints, we reduce operational risk, improve scalability, and free up our teams to focus on proactive exception handling. T+1 is not simply a compliance deadline, it is an opportunity to future-proof our business and better serve clients who are demanding more speed and certainty in their transactions.
A lot of work around automation was implemented as a result of the US, Canada and Mexico move to T+1, therefore with more markets following this is reinforcing a shift that was already underway: from operational silos to integrated, intelligent trade ecosystems. And for firms that embrace this early and decisively, there is a real competitive advantage to be gained.
How are geopolitical and macroeconomic events shaping your business decisions? How do you see these changes shaping the securities finance market overall?
Long: One way to successfully navigate such market conditions is through a broad, diverse trading book. The ability to pivot and leverage a wide range of distribution channels to deploy liquidity across different trade structures is key to both managing risk and driving risk adjusted returns for our client base. For example, while we continue to see pressures on the short side, we have observed strong performance across the funding book through 2025 year-to-date, driven by the long positioning of the market and the need to fund assets. Quantitative tightening has reduced central banks鈥� balance sheets with an abundance of collateral returning to the market after a sustained period of collateral scarcity. The general long bias that has persisted has meant much of the focus we鈥檝e seen across the borrower community has switched away from the short side, and more towards the funding of longs.
This year鈥檚 volatility was spurred by macroeconomic policy shifts occurring around the world, with new election candidates coming into power globally. The US鈥檚 most recent policies on tariffs generated short interest, particularly in sectors such as automobiles, healthcare, and semiconductors, all of which we have particularly targeted by tariffs. This in turn has presented a significant opportunity for short interest in the market and resultant borrowing demand.
The war in Ukraine, alongside ongoing geopolitical tensions in the Middle East, continues to fuel demand for defence stocks. Unsurprisingly, gold hit all-time highs amid a flight to safety, reflecting investors鈥� lack of appetite for high yield during instability in equity markets, compounded by Moody鈥檚 downgrade of the US credit rating, resulting in hedge fund deleveraging due to turbulence and uncertainty.
Gillingwater: Elections in much of the world prompted ongoing market nervousness, with the new US administration posing a degree of volatility across international markets. European sovereign bonds subsequently sold off in wild fashion during the latter part of the period as uncertainty around US defence policy led to historic fiscal expansion efforts. Germany was forced to materially increase defence spending, with significant new bund issuance driving sovereign bond yields meaningfully higher. Indeed, the 30 basis points one-day increase in the 10-year German Bund was the most since the fall of the Berlin Wall, back in 1989. The lingering war in Ukraine and more recent Israel-Palestinian conflict only added to heightened concerns around market risk. These instances broadly prompted a flight-to-quality, with a notable bid for dollar-denominated bonds.
How do you assess the outlook for European securities lending markets for the remainder of 2025 and into 2026?
Gillingwater: 兔子先生lending activity remains resilient in the face of numerous headwinds and regulatory changes. Traditional reactive flow remains somewhat subdued with moderate specials demand and a lack of corporate events and IPOs. Moreover, well-telegraphed central bank policy and adequate market liquidity leads to narrower fees across the bond lending space. However, lenders are finding niche opportunities with more focussed strategic initiatives coming to the fore. Collateral upgrade trades should remain well-sought as banks contend with funding ratios and seasonal financing pressures. Across both fixed income and equities, we expect the trend of alternative collateral structures to remain in place, benefitting clients able to look down the collateral credit curve and adopt segregated structures which align with the agent lenders鈥� evolving regulatory capital framework. These types of structures typically improve a beneficial owners鈥� attractiveness, presenting significantly higher utilisation and elevated lending fees.
Bowman: These 鈥榗rystal ball鈥� type questions are becoming more and more difficult to answer, for many of the reasons already covered. What will be key for any market participant though will be to become as nimble and as open to opportunities as possible. With change being the only permanent, continuing to operate for another 12 months without embracing the flexibility to consider new trade opportunities, collateral options, and different market structures, lenders will remain heavily reliant on the occurrence of specials, and as the European markets have shown over the past 12 months, there is no guarantee they will materialise in any great abundance.
Ross Bowman: As the Greek philosopher Heraclitus famously said: 鈥淭here is nothing permanent, except change.鈥� The securities lending market is no exception. Along with global capital markets reacting to breaking news on trade deals on a daily basis, ever-changing macro-conditions make for difficult year-over-year (YoY) securities lending performance comparisons.
At a simple 鈥榥umbers鈥� level, reviewing performance is straight-forward, but the factors influencing the numbers are changeable and constantly evolving. Looking at the European equity securities lending market, revenues have progressively declined YoY. Although mergers and acquisitions (M&A) activity in 2024 did increase over 2023, 2025 has proved to be a slow starter. M&A and directional market investor conviction are large contributing factors to securities lending performance. Consequently, when these elements are absent or in decline, lenders focus on comparative performance trends, encompassing collateral flexibility, trade structures (term versus. overnight) and peer-group comparisons, to determine overall levels of programme performance, focusing on programme optimisation rather than the YoY revenue delta itself.
European government bonds remain in high demand, although downward pressure on fees has increased, as a result of borrowers becoming more efficient at managing balance sheet costs, adopting alternative trades structures to source supply (such as swaps), while seeking longer term trades, to replace overnight and shorter-dated term supply.
Zoe Long: US trade policy and geopolitical developments will continue to shape market direction and influence central bank policy. While the recent tariff-induced volatility was relatively short lived, prevailing uncertainty nevertheless means that risk remains. 听
In the Middle East and North Africa (MENA) region, there continues to be an acceleration of demand for specific names, which presents potential opportunities for the rest of the year and into 2026, while we anticipate opportunities in continental Europe, particularly in the context of European bank mergers and acquisitions, especially in Italy which has fuelled performance.
More broadly, we continue to expect counterparties to remain acutely focused on financial resource management, with binding constraints driving trading decisions. Accessing supply from capital-efficient sources of liquidity will remain central as will funding long inventory via collateral transformation and reverse repo to generate liquidity coverage ratio (LCR) and net stable funding ratio (NSFR), in turn providing opportunities to drive alpha across various parts of the book.
Joseph Gillingwater: 兔子先生lending markets have had a lot to contend with over the past 12 months, as stubborn inflationary pressures prolonged global higher-for-longer interest rate narratives, while geopolitical pressures added to uncertainty.听Fixed income demand and revenue remained healthy with collateral upgrade trades continuing to be well sought. Indeed, equity valuations continued to rise after the US elections, with the Republican administration expected to be softer on bank regulation. This rally resulted in added funding pressures over year-end with banks having to contend with global systemically important banks (G-SIB) score pressures. In short, this increased the demand for highly rated core European sovereign issuance.
Equity lending flows declined as elevated stock valuations meant investors remained heavily skewed to the long side. General collateral and hard-to-borrow volumes were impacted as a result, with revenues pressured for much of the period. However, activity rebounded in the first quarter of 2025 with significant market turbulence driven by uncertainty over the direction of US trade policy. President Trump鈥檚 announcement of reciprocal tariffs on 2 April triggered a sharp equity sell-off and spike in volatility, resulting in more concentrated borrowing demand.听
In which European markets, both by jurisdiction and asset class, do you identify the strongest opportunities for growth of your lending business?
Long: Given a number of headwinds across Europe, the Middle East and Africa (EMEA), which have clearly impacted industry revenues and relative performance over the past two years, it has become increasingly important to both broaden and evolve the product in order to continue to drive alpha and diversify revenue streams.
The MENA region is a current focal point in the securities lending market. A growing number of hedge funds have established operations in Saudi Arabia, aiding the development of a fully functioning capital market with both funding and short selling key to liquidity depth and supporting derivatives markets. We see the Gulf Cooperation Council (GCC) region as a key opportunity, and continue to build out our Saudi footprint both in terms of asset depth and diversity, client base, and counterparty breadth, while maintaining a keen focus on collateral and our financing capabilities as we look forward.
Within Turkey there was clear engagement and activity from a securities lending perspective throughout Q1, although flows remained somewhat constrained. Despite political tensions, the short sell ban remains under review and, if lifted, we anticipate further opportunities on the back of positioning to deploy liquidity and drive returns for our client base.
Elsewhere, market volatility driven by macroeconomic pressures has led investors to gravitate towards the safety of bonds. Despite Moody鈥檚 downgrade of the US credit rating, sovereign bonds have demonstrated remarkable resiliency throughout tariff-induced turbulence, especially in the backdrop of increased importance of capitally efficient borrowing. While short positioning across the evergreen space has decreased, lending performance has remained strong, driven more from the funding side where institutions remain focused on upgrading collateral into high-quality liquid assets (HQLA) within LCR compliant structures.
Bowman: 2024 witnessed a substantial year-on-year growth of investor inflows into European exchange traded funds (ETFs). Although its flexibility, simplicity, and relatively low cost of investment make it an asset class of choice in Europe today, the overall size of the ETF market is much smaller than that of the cash equity and fixed income markets. With collective investment vehicles, such as UCITS funds, representing around 18 per cent of global on loan balances, and consequently an even larger percentage of available market inventory, the launch and expansion of ETFs by UCITS funds supports this growth potential, as demand in the lending market to borrower ETFs and the underlying securities of the ETF could potentially provide additional securities lending performance returns for investors.
What pressures and opportunities have recent regulatory initiatives created for your securities lending business?听
Rickie Smith: Recent regulatory initiatives such as Basel III capital rules, the Central 兔子先生Depositories Regulation (CSDR), and the move toward T+1 accelerated settlement have created both significant pressures and compelling opportunities for our securities lending business.
The pressures are clear 鈥� Basel III鈥檚 capital and liquidity requirements have prompted many counterparties to reassess the economics of their lending and borrowing strategies, making balance sheet efficiency more critical than ever. At the same time, CSDR鈥檚 settlement discipline regime has heightened the operational stakes, demanding greater precision and timeliness to avoid penalties and maintain client trust. The shift to T+1 in key markets is compounding these challenges by tightening operational timelines and reducing the margin for error across the trade lifecycle.
But these changes are also driving innovation. We have been proactive in investing in automation, real-time data infrastructure, and smarter optimisation to support more agile, compliant, and cost-effective lending. These upgrades not only mitigate regulatory risks, but also enhance the client experience by improving transparency, settlement efficiency, and return optimisation.
Overall, while the regulatory trajectory demands more from us operationally, it is also reinforcing our strategic role in helping clients navigate an increasingly complex market landscape with confidence and agility.
Gillingwater: Like recent years, regulation has continued to shape the wider industry, with the new US administration expected to ease the regulatory burden on banks. This could lead to some dislocation versus international peers, potentially disadvantaging non-US banks most active in international markets. Most of the focus remains on the Basel III Endgame, and clarity on whether the Trump administration will alter the Basel rules or even mark the 鈥楨ndgame for Endgame鈥�.
While delayed for 12 months, the US 兔子先生and Exchange Commission鈥檚 (SEC鈥檚) mandatory clearing rules require significant attention and staffing resources. 兔子先生lending transactions are out of scope, though cash reinvestment desks partaking in US Treasury repo transactions will need to ensure full documentation is in place for compliance in June 2027.
Lastly, settlement efficiency remains a key theme after Canada and the US successfully adopted the move to an accelerated T+1 settlement cycle in May 2024. In contrast with prior concerns around settlement discipline, the relatively smooth North American process paves the way for other markets to adopt the same measures, with Europe and the United Kingdom confirmed to transition in October 2027, benefitting from 鈥榮econd-mover advantage鈥�.听
The UK, Europe, and Switzerland are in alignment when it comes to T+1, with a confirmed implementation date of 11 October 2027. What investments and adaptations will your firm need to make to be T+1 ready? What role will automation play in this?
Bowman: Each market participant will have its own process and technological needs with respect to the adaptation of its business in accommodating T+1 settlement in the UK, Europe, and Switzerland. The securities lending market has already adopted T+1 settlement in the US last year, with valuable lessons learnt, by each firm, from that experience. However, the complexity of Europe鈥檚 many markets, multiple currencies, numerous central securities depositories (CSDs), etc., will create three main challenges.
The first will be the internal changes firms will need to make to their current processes, either manual or with automation. The second will be the alignment and agreement of 鈥榤arket standard鈥� practices and guidelines so the interconnectedness across the lending market and participating firms is minimally disrupted. The third will be related to the scale in adoption of automated matching platforms to minimise manual processes, under the restricted settlement timeframe.
T+1 industry taskforces and the International 兔子先生Lending Association (ISLA) are keeping market participants 鈥榦n point鈥� with the second challenge, but, as we saw with the move to T+1 in the US equity market, adoption of automated platform solutions appeared not to be widespread, creating process fragmentation across the industry, that was typically backfilled with manual solutions; processes that may well still be in place today. Having an effective strategy and a detailed development and investment plan in place, well in advance of the implementation of the regulation, supported by a mindset of open engagement with the wider industry, will be a critical component to the success of a smooth transition for any business.
Smith: The move to T+1 settlement is more than just a compression of timelines, it is a fundamental shift in market infrastructure that demands front-to-back integration, speed, and accuracy. For our firm, it is a catalyst to accelerate strategic investments we have already been making in automation, data quality, and exception management.
As the industry develops new best practices to address the regulatory changes, our focus from a development point of view is twofold. First, we are investing in real-time processing capabilities across the full trade lifecycle, improving data integrity across systems and counterparties which will be imperative in ensuring our readiness. Second, we are working closely with our technology partners and internal teams to ensure our operating model is lean, resilient, and capable of straight-through processing wherever possible.
Automation will play a pivotal role 鈥� not just in meeting the compressed timelines, but in transforming how we operate long term. By automating manual touchpoints, we reduce operational risk, improve scalability, and free up our teams to focus on proactive exception handling. T+1 is not simply a compliance deadline, it is an opportunity to future-proof our business and better serve clients who are demanding more speed and certainty in their transactions.
A lot of work around automation was implemented as a result of the US, Canada and Mexico move to T+1, therefore with more markets following this is reinforcing a shift that was already underway: from operational silos to integrated, intelligent trade ecosystems. And for firms that embrace this early and decisively, there is a real competitive advantage to be gained.
How are geopolitical and macroeconomic events shaping your business decisions? How do you see these changes shaping the securities finance market overall?
Long: One way to successfully navigate such market conditions is through a broad, diverse trading book. The ability to pivot and leverage a wide range of distribution channels to deploy liquidity across different trade structures is key to both managing risk and driving risk adjusted returns for our client base. For example, while we continue to see pressures on the short side, we have observed strong performance across the funding book through 2025 year-to-date, driven by the long positioning of the market and the need to fund assets. Quantitative tightening has reduced central banks鈥� balance sheets with an abundance of collateral returning to the market after a sustained period of collateral scarcity. The general long bias that has persisted has meant much of the focus we鈥檝e seen across the borrower community has switched away from the short side, and more towards the funding of longs.
This year鈥檚 volatility was spurred by macroeconomic policy shifts occurring around the world, with new election candidates coming into power globally. The US鈥檚 most recent policies on tariffs generated short interest, particularly in sectors such as automobiles, healthcare, and semiconductors, all of which we have particularly targeted by tariffs. This in turn has presented a significant opportunity for short interest in the market and resultant borrowing demand.
The war in Ukraine, alongside ongoing geopolitical tensions in the Middle East, continues to fuel demand for defence stocks. Unsurprisingly, gold hit all-time highs amid a flight to safety, reflecting investors鈥� lack of appetite for high yield during instability in equity markets, compounded by Moody鈥檚 downgrade of the US credit rating, resulting in hedge fund deleveraging due to turbulence and uncertainty.
Gillingwater: Elections in much of the world prompted ongoing market nervousness, with the new US administration posing a degree of volatility across international markets. European sovereign bonds subsequently sold off in wild fashion during the latter part of the period as uncertainty around US defence policy led to historic fiscal expansion efforts. Germany was forced to materially increase defence spending, with significant new bund issuance driving sovereign bond yields meaningfully higher. Indeed, the 30 basis points one-day increase in the 10-year German Bund was the most since the fall of the Berlin Wall, back in 1989. The lingering war in Ukraine and more recent Israel-Palestinian conflict only added to heightened concerns around market risk. These instances broadly prompted a flight-to-quality, with a notable bid for dollar-denominated bonds.
How do you assess the outlook for European securities lending markets for the remainder of 2025 and into 2026?
Gillingwater: 兔子先生lending activity remains resilient in the face of numerous headwinds and regulatory changes. Traditional reactive flow remains somewhat subdued with moderate specials demand and a lack of corporate events and IPOs. Moreover, well-telegraphed central bank policy and adequate market liquidity leads to narrower fees across the bond lending space. However, lenders are finding niche opportunities with more focussed strategic initiatives coming to the fore. Collateral upgrade trades should remain well-sought as banks contend with funding ratios and seasonal financing pressures. Across both fixed income and equities, we expect the trend of alternative collateral structures to remain in place, benefitting clients able to look down the collateral credit curve and adopt segregated structures which align with the agent lenders鈥� evolving regulatory capital framework. These types of structures typically improve a beneficial owners鈥� attractiveness, presenting significantly higher utilisation and elevated lending fees.
Bowman: These 鈥榗rystal ball鈥� type questions are becoming more and more difficult to answer, for many of the reasons already covered. What will be key for any market participant though will be to become as nimble and as open to opportunities as possible. With change being the only permanent, continuing to operate for another 12 months without embracing the flexibility to consider new trade opportunities, collateral options, and different market structures, lenders will remain heavily reliant on the occurrence of specials, and as the European markets have shown over the past 12 months, there is no guarantee they will materialise in any great abundance.
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