Finadium has released a new research report on the central collateral funding desk. This desk combines the operational functionalities of collateral management and a profit-oriented approach to acquiring and deploying collateral both internally and externally. While many financial services firms have consolidated some level of collateral operations and technology, this new approach looks to the pricing of collateral as a revenue opportunity.
This Finadium research report provides a business plan template for market practitioners wanting to establish a CCF desk in their organizations. The report is designed to facilitate each organization’s creation of their own business plan, using the ideas and the supporting information found herein. The intention is to accelerate the business plan development process and assist managers at multiple levels of the organization in understanding the need, functionality and operations of the CCF desk.
The possibility of collateral shortages has encouraged more intelligent collateral use. These shortages might arise from a confluence of more collateral needed for cleared and non-cleared OTC derivatives and by bank needs for more High Quality Liquid Assets to support their trading books. In 2012, expectations for new collateral needs ranged from US$800 billion to US$10 trillion or more. In the short-term, not only has no collateral crunch emerged, but the opposite has occurred, with collateral transformation trades producing yields that are little better than a standard government bond for government bond securities loan. At the same time, the market has shown distinctly different pricing for high quality versus low quality assets. One example is the high demand for government bonds of low risk countries such as Denmark and Canada, which at times offer negative returns for investors. Meanwhile, returns on Asset-backed Securities (ABS) repo have been 10-to-15 times greater than spreads for government bond repo.
In sum, there are no shortages today, but highly differentiated pricing for high risk versus low risk assets due to collateral and investment needs. It is still expected that collateral bottlenecks, or localized shortages, will occur at individual firms and in individual markets. The argument follows that the more that firms prepare for a new collateral pricing environment, the fewer bottlenecks they will experience. This will lower collateral costs and increase profitability.
This new Finadium report is recommended for managers and strategists of any collateralized trading activity within a financial services firm, as well as their counterparties and service providers. It details the differences between central collateral funding and repo, ideal reporting lines, technology ownerships and ideas on risks and risk mitigation.
Please visit the Finadium website for more information.