INSIGHTS

Produced in collaboration with the University of Cambridge Judge Business School, the Central Banks: Trends and Investment Outlook Report highlights key areas of shared practice, trends and correlations across respondents to our recent survey. In broad terms, our research reveals a gradual but definite expansion of investment and trading activities by central banks beyond traditional boundaries, which is putting pressure on existing operational infrastructure and driving demand for third-party solutions and services.

The key findings below reflect a reappraisal of investment strategy and operations, also demonstrating a need for central banks to account for fast-evolving and unpredictable external forces, notably in the realms of macro-economics, financial markets and technology innovation.

Key Findings

39% of Central Bank survey respondents already invest in equities

1/3 indicate plans to invest in new market or asset classes

61% confirmed active participation in the repo markets; 39% invest in time deposits

72% reported use of derivatives as part of their investment management activities

44% confirm use of ISDA/CSA agreements when conducting derivatives transactions

1/3 currently undertake securities lending activity, with a small percentage expressing future interest in doing so

1/2 are planning a technology upgrade

“There is both anecdotal and statistical evidence of growing sophistication and innovation by institutions willing and able to invest beyond established parameters.”

Like all institutional investors, central banks have had to adapt to a prevailing low-yield investment environment over the past decade or so. Slow, fragile recoveries in developed economies and high levels of market volatility and political risk have combined to keep interest rates and investment returns at low levels. Disappointing yields from traditional asset classes have led many central banks to re-think their investment strategies.

This has taken a number of different forms, reflecting the diversity of approaches, priorities and mandate constraints across the central banking spectrum, including investment in a wider range of asset classes, currencies, and instruments, as well as the increased use of external managers. The tactics selected might be different, but the overall trend is clear: innovation in search of yield.

The investment mandates of most central banks—as well as their broader roles and responsibilities—make them relatively cautious in exploring new investment opportunities. However, there is both anecdotal and statistical evidence of growing sophistication and innovation by institutions willing and able to invest beyond established parameters.

A number of institutions are looking well beyond the central banks’ traditional focus on G-10 currency-denominated government debt, with some looking at a range of alternative assets.

Additional topics covered in this report include:

Securities lending: Growing interest, driven by QE, revenue opportunities
Repo market: Reassessing operations in a dynamic environment
Operating model: The increasing relevance of third-party services
Risk management: Derivatives and collateral managed in-house… for now
Data management: Toward a new paradigm
Future priorities: Planning for operational contingencies and strategic flexibility

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INSIGHTS

Central Banks 2018 Trends & Investment Outlook