The evolving role of collateral in international capital markets

Abstract

The financial crisis has led to changes in market behaviour and regulatory focus to control the risks inherent to financial market activities. Both developments are increasing the need for high-grade securities to be used as collateral in order to mitigate risks arising from multiple types of transactions. Tracking, sourcing and transforming collateral from rather fragmented securities inventories, often spread across a number of depositories, agents and geographic locations, is a challenging task for even the biggest firms. The definitive way forward is still unclear, but a number of options exist to help alleviate the burden associated with building and maintaining efficient collateral management practices. This paper assesses in more detail the impact on collateral from a number of the regulatory changes, as well as the way in which they are expected to accentuate the problem of collateral scarcity and fragmentation. The author also scrutinises a cross-section of the proposals available to manage collateral in this new environment.