The other day on our sister site, Asset Ops & Strategy, we wrote about the Collateral Initiatives Coordination Forum, an organization under the auspices of ICMA. That group has just released a paper, “Collateral Fluidity”. We take a look at a couple things they had to say.
The paper is Euro-centric, but much applies to other markets and there are lessons to be learned. Maintaining collateral moving around the system requires the “plumbing” (aka settlement systems) to keep up with the rest of the markets. The subtext was the expectation of collateral shortages and the need to manage collateral as efficiently as possible.
In Europe, settlement cycles are in need of harmonization. The paper took a look at the TARGET2-Securities project, the ambitious cross-border DVP infrastructure project. “…T2S is a transformational project which will improve the post-trading infrastructure in Europe by providing a single platform for securities settlement in central bank money and will substantially contribute to financial integration in Europe. Only when T2S is accomplished in 2015/16 will same day settlement be possible for all actors in the eurozone…”
The paper noted several times the importance of tri-party repo and efforts to link tri-party systems together. “…One of the major initiatives over the last couple of decades has been the development of triparty repo…The use of this form of repo, in conjunction with defined baskets of, high quality, general collateral has provided a major boost to collateral fluidity. With a view to further improving the efficient utilisation of collateral, by bringing together separate pools of liquidity, the ERC are discussing triparty settlement interoperability between the ICSDs (and eventually CSDs). This effort has been relatively slow to progress but has recently gained greater traction. When fully realised, this project will ensure that liquidity/collateral can flow freely, independent of the location of the collateral, thereby providing a real level playing field for participants regardless of which ICSD they use…”
The ERC’s efforts to include credit claims (e.g. loans) as good collateral was another area of focus in the paper. We know that loans have been used as collateral for financing deals in the U.S., but the trades are highly structured and operationally intensive. Recycling the collateral for funding is awkward. If the ERC is able to make loans financing-friendly, it will go a long way toward unlocking their liquidity and value. “…The ongoing tensions in financial markets have also seen the adoption by central banks of broadened criteria for eligible collateral assets against which financing may be provided to credit institutions. This encompasses certain credit claims and asset backed securities, in accordance with specified requirements which include valuation haircuts varied responsive to the assets in question…”
The paper is, we hope, just the beginning of the Collateral Initiatives Coordination Forum efforts. We applaud the hard work that it took to bring the parties together and have great expectations.
A link to the post in Assets Ops & Strategy is here.
A link to the CICF whitepaper is here.
A link to the CICF website is here.