Rating Collateral

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.