IOSCO predicts boom in use of collateral transformation

Dealers and settlement houses seek out high quality collateral to meet demand from clients for transformation services.

Demand for collateral transformation services will increase due to a need for high-quality liquid assets, according to the latest IOSCO report.

The report points to an upsurge in demand for high-quality collateral being met by many organisations, including custodians, dealers, and settlement houses. The findings stated that those institutions are looking to offer collateral transformation or upgrade services to their clients.

Anecdotal evidence in the report also suggests that demand for such services is on the rise as a result of the banks’ need to meet new capital charges requirements.

The suggestion is in stark contrast to a previous whitepaper issued by the DTCC in February which suggested that fund managers held doubts over the costs of collateral transformation services provided by banks.

“Collateral transformation is a fantastic euphemism,” said a fund manager in the DTCC white paper. “It means, `We will take whatever you have got, and charge you an awful lot to convert it into something that is useful,’ almost to the point that you are thinking, `What is the point in trying to do it?’ You are giving up most of the credit spread.”

Collateral requirements are set to hike towards the end of this year and central clearing requirements come into force for certain OTC derivatives in Europe. Global margin requirements for non-cleared derivatives will also come into force towards the end of 2016.