Banks, custodians and buy-side firms will have to find almost $100 billion of unrecognised assets to support a more demanding and complex collateral management ecosystem, according to a new study.
A paper by consultancy Capco estimated that $97 billion in previously untapped assets will be required to meet regulatory requirements from EMIR and Dodd Frank. It also found that the onset of the two-way initial margin rules for non-cleared derivatives will also result in a collateral shortfall of $60 billion alone.
Other collateral requirements include the initial margin needed for cleared trades, pre-funded variation margin, segregation requirements, default fund contributions, and tighter collateral eligibility.
“We have already seen a big spike in collateral requirements in recent years, forcing firms to seek out new sources of high-quality liquid assets within their inventories and via external channels,” said James Arnett, partner at Capco. “A range of factors mean that the supply of eligible collateral is continuing to tighten and as a result borrowing costs are still trending upwards. So while firms still need to focus on efficiencies and optimisation, they will also need to tap previously neglected or unrecognised pools of collateral.”
In order to remain compliant, the paper stated firms will have to prioritise a number of focus areas, especially how the rules impact buy-side notably around resources, in-house experience and operational ramifications. Ensuring technology is fit for purpose was also identified as an additional priority by the paper, as was addressing the lack of straight-through processing around legal documentation.
“An increased demand for high-quality liquid assets, greater market fragmentation and regulatory burdens will all crank up the pressure on fractured processes, inflexible systems and a lack of cohesions through the value chain,” the paper noted.