Reported by International Financing Review:
SSAs edge closer to posting swaps collateral
As the world’s largest public issuers gather behind closed doors at the IMF/World Bank Annual Meeting this week, a once arcane topic will now figure at the top of the agenda: posting collateral to swap counterparties.
Bankers would pay good money to be flies on the wall for this conversation. They have persistently badgered their most important clients since the onset of the financial crisis to abandon their treasured one-way credit support annexes (CSAs) – contracts that require banks to post collateral to sovereign, supranational and agency (SSA) issuers when out of the money on swaps, while not receiving collateral when the situation is reversed.
Many of the largest SSAs have refused to budge, with the prospect of millions in collateral flying out of the door proving a strong disincentive. But after having inched up swaps prices over the past year to compensate for these asymmetric contracts, dealers are at last signalling a turning point.
“All clients are aware of this issue and there is a real movement in the direction of more and more issuers signing two-way CSAs,” said the SSA head at a US bank. “Some are still in denial and refuse to go down that route, but the number in that camp is quickly becoming the minority.”
One-way CSAs are a hangover from the pre-crisis era of SSAs using their superior credit quality to demand collateral from banks without having to reciprocate. These exposures have become prohibitively expensive for banks under Basel III, which requires funding and credit costs to be priced appropriately. This can add tens of basis points on to quotes for the long-dated interest rate and cross-currency swaps that SSAs use to manage their liabilities.