EUROPE – The Collateral Initiatives Coordination Forum (CICF) has warned European regulators over the "scarcity" of collateral at a time when the new EMIR regulation is expected to increase the collateral burden for pension funds.
In a white paper on collateral fluidity, the CICF – a group of European trade associations – stressed that the importance of collateral had grown in recent years, particularly since mid-2007.
It also pointed out that the demand for high-quality collateral would increase over time following the implementation of new regulations, such as the Basel liquidity requirements, and the shift of standardised OTC derivatives to central clearing.
Godfried De Vidts, CICF's independent chairman, said: "Too much haste in implementing multiple regulatory changes impacting collateral will lead to adverse consequences, which are already visible through the fear of a collateral squeeze."
CIFC's white paper argues that collateral should be seen as a "scarce" resource, and offers a number of ways regulators could better support the matching of collateral 'sources' and 'uses'.
It says that, for market participants to be able to deploy collateral in financial transactions, the applicable collateral assets (sources) must be effectively matched with collateral requirements (uses).
"This gives rise to the need to mobilise collateral assets, both within and between organisations," it adds.
The CICF claims the "real challenge" is to efficiently mobilise the flow of collateral inside and between organisations, by eliminating barriers to collateral flows and the development of an efficient market infrastructure.
It says "known problems" in European financial market infrastructures need to be fixed, alongside the delivery of the major technological developments to realise both the post-trading infrastructure called TARGET2-Securities (TS2) and the shift to a standard T+2 settlement period.
The CICF says the TS2 recently launched by Brussels should make cross-border settlement identical to domestic settlement in terms of cost, technical processing and efficiency.
"A single set of rules, standards and tariffs will be applied to all transactions in Europe, dramatically reducing the complexity of the current market infrastructure," it says.
"Over time, cross-border fees should be lowered, making the European securities markets more attractive and cost-effective."
The group finally claims that, without the effective phasing of proposed changes, serious adverse consequences for financial markets could be anticipated as a result of "inadequate" collateral fluidity.
Earlier this year, industry experts voiced concerns over Brussels' new European Market Infrastructure Regulation (EMIR).
Responding to the European Securities and Markets Authority's consultation paper on the draft technical standards for the regulation on OTC derivatives, CCPs and trade repositories, they argued that EMIR could force pension funds to increase their margin calls for cleared OTC derivatives trades.