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Leaving no stone unturned in the search for collateral

While delegates at this week’s snow-bound Global Securities Financing conference in Luxembourg reached some kind of consensus on the new collateral required by OTC derivative reforms (trillions not billions), there was less agreement on where to find it.

The finance industry might speak with one voice in trying to convince regulators to reduce the overall burden but some believe that the potential shortfall is overstated: the supply is there, you just need to know where to look.

In short, many banks have been able to post collateral in line with business needs across the globe without having to keep too close an eye the totals being tied up. But in the new world of deleveraging, smaller balance sheets and higher regulatory capital ratios, they are having to institute something akin the real-time inventory management systems that food retail, logistics and consumer electronics industries among others have long since implemented and refined.

Speaking at a ‘market observers’ panel in Luxembourg, Josh Galper, managing principal at consultants Finadium, argued that US$41.3 trillion in government debt securities is available to serve as collateral, US$33 trillion of which was issued by OECD countries, more than enough to cover most estimates of the rise in demand – if the channels for identifying and mobilising it can be prised open.

This will require some innovation and compromise on the part of market infrastructure providers and financial institutions, perhaps in the form of insurance to those who hold the collateral but are unconvinced that the returns merit the risks,

Speaking on the same panel, David Field, managing director at Rule Financial, another consulting group, said that in his experience “everyone and no one” was responsible for managing collateral at many large sell-side firms.

As the lobbying efforts with regulators continue, one hopes that the process and systems challenge is being confronted behind the scenes.