Market fears risky collateral to cause new crisis

Half of market participants believe the next financial crisis will stem from poor collateral management practices, a survey has found.

A report commissioned by Swiss-based central counterparty and central securities depositary SIX Securities Services, found 48% of buy- and sell-side firms in the UK, France and Germany think the securitising and repackaging of existing collateral portfolios to create new collateral pools will sow the seeds of the next financial crisis.

Only 15% of companies surveyed considered the pricing structure of the post-trade industry very or completely clear, suggesting a delayed response in the industry in reacting to new regulation.

Of the 60 firms interviewed, 55% were from buy-side institutions managing an average of £56.7 billion, while the remaining 45% were from the sell-side, with respondents split evenly across the UK, France and Germany.

Nearly three quarters of firms surveyed were currently using a tri-party collateral management system, of which the majority said reduced time spent on collateral management.

“Collateral is now of critical importance to financial institutions,” said Robert Almanas, managing director for international services, SIX Securities Services. “The collateral lockdown brought about by the Dodd-Frank Act, European market infrastructure regulation and Basel III means collateral management – for so long consigned to the back-office – is now an issue of board-level concern.”

“Good collateral management is not just about keeping an institution’s operations as efficient as possible but ensuring that they are also simpler and more secure than in the past,” he said.

In terms of the state of the financial industry, 70% of respondents believed credit rating agencies were having a negative impact on recovery from the financial crisis and53% believed there would be a collateral shortfall by 2015.

“The race for collateral is only becoming more intense. Those firms which equip themselves with real-time, tailored collateral management systems stand the best chance of success,” Almanas said.