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SIX Securities Services calls on capital markets to pre-empt collateral damage and learn from mistakes of the past

Today, SIX Securities Services – the post-trade services provider – released data from a micro-survey conducted at the SIBOS conference in Osaka, Japan. Opinions of the largest sell-side banks and broker dealers were captured, as a pulse check of the industry on issues relating to collateral and the safety of market infrastructures.

Quality of collateral is as important as cost

· 85% believe that selecting a market infrastructure on cost alone increases exposure to risk

· 92% believe that the quality of collateral should be given equal consideration as the cost of collateral

According to Thomas Zeeb, chief executive officer, SIX Securities Services, “Some CCPs believe that generating new collateral by securitising and repackaging existing portfolios is a way forward. I fundamentally disagree with this approach. That the industry is already thinking about repeating the sins of the past, by repackaging securities to create new collateral pools is frightening. Collateral should be simple, of high quality, liquid, and easily-valued. Competing on poor collateral quality sows the seeds for the next failure and subsequent crisis.”

Assessing the collateral shortfall

· 69% believe there is enough collateral to go around

· 31% believe there is not enough collateral to go around

· Of those who believe there is a collateral shortfall, assessments of the shortfall range wildly from 5% to more than 200%

The opinions of the largest sell-side banks is that there is enough collateral in the system, but due to regulatory requirements, the liquidity is not being distributed efficiently.

Thomas Zeeb, “Collateral management and its optimisation are major concerns for financial institutions at the moment. Collateral is not being distributed efficiently. And questions abound: Who can provide quality collateral on the large scales needed? How can we ensure that criteria defining such quality are not a sliding scale?”

This research coincides with the launch of a new post-trade industry report by SIX Securities Services. The report is based on discussions held during SIX Securities Services’ post-trade forum, hosted by Mondo Visione and in conjunction with SunGard.