Collateral liquidity

The markets are struggling today with collateral management as never before. The fragmentation of market infrastructures, volatility in markets, increased margining requirements and counterparty risk requirements are all sucking in quality collateral, leaving the dregs to be shared throughout the market, leaving financial services firms to either pay for quality or become under collateralised.

Stock Borrowing and REPO activities essential to the overall performance are being badly hindered and hampering the underlying markets ability to perform efficiently. Nothing operates in markets independently of any other business or operation. The systemic makeup of the financial markets is often one of its strengths but at times it can become a serious weakness and a cause for concern

The ease to utilise collateral and move it quickly and seamlessly where it is needed is a fundamental pillar of a successful market. Impediments to free movement create illiquid junctions to business and operational efficiency that can lead to increased costs and at worst cash flow problems and failures.

When OTC enters central clearing the need for margining and therefore collateral increases from what today is already a difficult market for finding and using quality collateral. Quality being the operative word, as it looks like the market will have to either accept less quality or more collateral to make up the shortfall. Either way collateral liquidity looks like becoming even tighter in the future.

With the move to T+2 in Europe and investigations into moving to T+1 in the USA in the future, how will this impact collateral liquidity?

It should certainly increase turnover as obviously more assets are moving around the market at a faster rate. This is positive for liquidity. However, if turnover increases it will put pressure on systems within market infra-structure firms and financial services firms, to manage and settle collateral. In Europe the T2S project should have a positive impact on cross-border collateral liquidity but this assumes that most CSDs are a part of T2S.

Find out what industry guru Goran Fors, Global Head of GTS Banks, SEB, and the rest of the industry panel think about the impact on collateral at the next Post Trade Forum  debate T+2 and T2S on the morning of the 26th June at the London Stock Exchange.