Contrary to popular opinion, the financial markets have
enough collateral – some US$75 trillion – but the problem is access,
availability and quality.
Such a situation has led to the ascendency of the importance
of collateral management as regulators move to make the financial system safer
with rules such as the Dodd-Frank Act in the US and the European market infrastructure
In a session at Sibos in Osaka entitled ‘Collateral management
insourcing – the next frontier’, panel chair Godfried De Vidts, director of European
affairs, ICAP, discussed how firms should deal with the increasing collateral
requirements and OTC derivatives.
The question for institutions, according to De Vidts, was
how to access and manage good collateral when many sovereign bonds were being
downgraded and a broader range of instruments required more proscriptive
“You need to be sure you use collateral wisely, in the right
place and at the right time,” he said.
Given the predicted shortage, smart partners were needed all
along the transaction chain; infrastructure, global custodians, agency banks,
The essential problem was that in different jurisdictions,
more – and better quality – collateral was being demanded by regulators to
cover a wider range of instruments; and it is being required faster.
“People are required to post collateral for disciplined
margin calls throughout the day,” said Jo Van de Velde, managing director,
Euroclear, providing an example of how quickly collateral was now often needed.
“You need to be able to deal with more segregation,
discipline and reporting requirements. Collateral is like electricity – you
need it everywhere. It is becoming systemic in nature,” he observed.
But Van de Velde warned that collateral management and risk
management were two different things: “You can’t become over-reliant on
Greater demands were also being placed on various forms of
collateral, the panel explained.
“Strong Asian economies have meant increasing demand on
local currencies,” Taketoshi Mori, head of security market infrastructure, Bank
of Tokyo-Mitsubishi UFJ said of the present experience in Asia. “What is
important in collateral is liquidity, financing and funding.”
And new instruments were also being collateralised.
“Bank loans are now being looked at as a form of collateral,
and even if you had to put up perhaps a 70% haircut, that might be okay if the
loans were valuable,” said Stefan Lepp, CEO of Clearstream Banking.
However, Alain Pochet, head of clearing, custody and corporate
trust services at BNP Paribas, warned that while anything could theoretically
be collateralised, not everything should.
“Of course you could collateralise a whole range of new
instruments but you need to be concrete in your valuation and definition,” he
said. “The issue would not just be the new forms of collateral which would need
to be dealt with, but also that everyone agreed on them.”