Post trade crisis – collateral management crunch driven by the intersection of complex regulation

April 27, 2012 - PRLog -- As key regulatory changes - CSD Directive, EMIR and Basel III- come into play, the combined force of these regulations are creating serious challenges for market participants operating in the post trade landscape, mainly due to the lack of clarity around the interpretation of the various stands of legislation, and the ambiguity around their collective impact.

The CSD Regulation coming down from Europe, which was published earlier this year, will break down the domestic monopolies of CSDs as does the European Central Bank’s Target2-Securities initiative, by allowing connectivity to their counterparts in other countries. The aim of the regulation is to reduce clearing and settlement fails and bring down the costs of cross border settlement for transactions in Europe, which are up to four times as much as those for national markets. Virginie O'Shea, Analyst, from the Aite Group suggests ‘the issue of redefining what a CSD is and how it should operate is, however, a serious point of concern for market participants, given that encouraging more competition could result in a ‘race to the bottom’, a fear that is also present within the current clearing and settlement environment.”

“Cutting costs to face down competition and forsaking the robustness of key market infrastructures may therefore increase systemic risk within the clearing and settlement environment overall”

Compiling the effects of the CSD regulation, EMIR and Basel III are combining to fuel huge growth in the demand for high quality collateral, with regulators insisting that banks both retain a certain proportion of tier 1 assets on their balance sheets, and use these same assets as collateral for derivatives trades, once conducted OTC but now subject to mandatory CCP clearing.

According to Bill Rickard, Head of Regulatory Development, from  RBS “the QIS results appear to suggest considerable differences in interpretation of the Basel III guidelines at bank and individual regulator level. For example what exactly is an operational deposit? So will the implementation of the rules in each jurisdiction really result in a level playing field?” Simultaneously we are seeing a drop in the availability of these in-demand assets creating a collateral squeeze making collateral management a tough task.

According to Jaap Mauritz, Senior Policy Advisor, and Jeannette Capel, Senior Policy Advisor, from De Nederlandsche Bank ‘empirical evidence shows that absolute collateral scarcity seems unlikely for the euro area as a whole, but also that the supply of high-quality collateral will grow at a lower rate than the demand for it. Individual banks may thus face collateral shortages, calling for more efficient collateral management’

The latest regulatory initiative in this space from the CPSS and IOSC will now subject CCPs to the same stress tests as other systemically important financial institutions; clearing houses will need to prove they maintain enough capital and liquidity to endure the collapse of their two largest members, a ruling that will place yet more pressure on liquidity, funding, and the efficient functioning of markets. All this makes the post trade landscape a testing one right now.

TradeTech Post Trade, 11th-13th of September 2012, London will be addressing these critical post trade issues by exclusively bringing together key  regulators, central banks, and those responsible for clearing, network and collateral  management across financial institutions to determine collaborative solutions.

To receive more information about TradeTech Post Trade please contact us on +44 (0)207 368 9332 or email tradetech@wbr.co.uk or visit www.tradetechposttrade.com