ICMA Annual General Meeting and Conference, Berlin
European Securities and Markets Authority
JUne 5 2014
Fluidity of collateral
Let me now turn to collateral, which is high on your agenda. Collateral is playing an increasingly important role in financial markets and at times it can become relatively scarce. This comes from three drivers:
1. the flight from unsecured lending to secured lending (due to the crisis);
2. the new regulation that requires collateralisation of bilateral derivatives or more central clearing in order to have safer derivatives markets (due to the crisis); and
3. the expansion of monetary policy through conventional and non- conventional
instruments (due to…the crisis).
To compensate, there is more available and eligible collateral that can be used because of:
1. increased issuance of EU sovereign debt (due to the crisis);
2. because the ECB has widened the list of eligible assets (to accomodate the monetary expansion following the crisis); and
3. because the market participants have put in place solutions to transform assets into collateral and lend it to those that require it (this time, not strictly due to the crisis).
In the past months, there has been the discussion whether there is sufficient collateral for all the regulatory and non-regulatory requirements. Several studies looked into this and the current general consensus is that, overall, there is enough available collateral. High-quality collateral availability (supply) in Europe is calculated between 10 and 12 trillion EUR (depending on whether and how you apply the haircuts and on the degree of availability) while demand is estimated around 4-5 trillion EUR (depending on different estimates). The question is progressively turning from how much collateral there is and how much is needed now, to two other more interesting questions:
1. How will that evolve in the coming years; and
2. How fluid is the collateral market to ensure that supply and demand can meet.
Let me reflect on the likely evolution. We can point out to two factors at least:
1) Bilateral margin requirements on collateral will start increasing from 2015 onwards; and
2) Monetary policy, assuming the EU wide economy will regain strength at some point in time, will change and put into circulation a lot of collateral (at the same rhythm that gets the extra liquidity out of circulation). How that will fit and interact should be a priority for the bodies in charge of monitoring financial stability.
On the notion of “fluidity”: this is the ability of the market to place the collateral in the right point at the right moment to allow its use by the market participants. Collateral, according to some, is “the new cash”. Collateral has a certain “velocity”, that depends on the rate at which it is re-used, like cash. There seems to be consensus on the increased importance of the collateral market (securities lending, repo market, collateral transformation) and its role in the general functioning of the financial system and even on financial stability.
From that perspective, some say that collateral fluidity and collateral availability is so important that it should not be inhibited, at the risk of causing systemic effects. Others say that if collateral is so systemically important, it should attract a higher degree of regulatory attention. Whatever the outome of this debate, it is clear that we do not have a sufficient understanding of the functioning of this part of the market.
Hence, apart from regulations designed to allow better infrastructures for the collateral cycle, like CSDR, we need measures to ensure that regulators have a good picture of collateral, and its risks to financial market functioning. Therefore, I am very happy that the Commission has proposed a regulation that will require the reporting of Securities Financing Transactions (SFT) to trade repositories. SFTs were left outside the scope of MiFID, so it is now an opaque market. I am confident that such a change could bring the same benefits as we are now observing with the reporting of derivatives to trade repositories under EMIR.