One of the major problems in the stabilisation of securities markets is to find a recognised and standard mechanism to rate the quality of collateral. Clearing Houses have their own methods of assessing the quality of the collateral pledged by financial
services firms but this has to be more transparent.
With global markets intertwined it is imperative that the Custodians and Clearing Houses that act as the glue in the markets, all operate to the same measurement rules for collateral. This has always been a necessary market requirement but in the future
it will be essential.
With the sovereign debt issues and such volatility in markets the threat of losing collateral value is huge. Indeed in the future no asset or counterparty can be considered secure. The once sacrosanct assets that would previously have been bought or traded
with almost unimpeachable sources have now to be questioned continuously within the daily management and controls mechanisms.
What then are the chances of producing a global standard for collateral rating? Could there be an open algorithm that all firms could use to value collateral? Could the industry move away from existing rating agencies? Could the solution simply be a published
algorithm that all firms could use from the small wealth manager to the great Custodians and Clearing Houses? By eliminating rating agency costs the finance industry would of course increase their costs to produce their own ratings but at least this solution
would leave the responsibility with each firm and bring about better collateral management. All this and more, will be challenged and debated at the 17th April Post Trade Forum on
post trade operational risk being held at the London Stock Exchange.
The issue Gary is that the highest rated, most liquid assets are the easiest to assess from a pricing and quality point of view and therefore easier to standardise. (And almost by extension, the least valuable to standardise). The less liquid the instrument
the greater the benefit in establishing a unified approach and value. Of course, because they are less liquid they are also harder to apply a common algorithm. Hence the huge demand for the declining pool of highest quality collateral. This also doesn't
take into account individual business lines. For instance, many securities lenders limit their exposure to highly rated corporate bonds as they may have questionable liquidity at times of crisis such as a borrower default. Yet I have heard compelling arguments
for lenders to hold the assets until market conditions change or maturity. The ability to take differing views is also important.
Should be a great discussion at the Post Trade Forum.
Thanks Roy for that
Could the liquidity aspects be included in any algoritham? So less liquid assest would obviously get a low rating. Its the consistancy of how assets are valued and the need for everyone to value in the same way that i think would help. I do think there has
to be an alternative to the rating agencies
Yes the Post Trade Forum debate should be compelling
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