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Less than half of insurers believe they hold sufficient collateral, according to new BNY Mellon-sponsored survey

New research by BNY Mellon, the global leader in investment management and investment services, in association with Insurance Risk magazine has revealed increasing concerns over the availability of eligible collateral assets to post as margin as the move to central clearing looms.

Compared to last year, fewer respondents – 44% down from 65% – said they hold sufficient ('enough' or 'comfortably enough') assets of the requisite quality within their investment portfolios to meet collateral margining requirements and other pledges.

Conversely, levels of readiness around the move to central clearing have improved over the past year. Fifty-four per cent (54%) of respondents said they understand the impacts and are working towards operational readiness, compared to just 32% in the 2012 survey.

Last year, nearly half (46%) of those surveyed had either not yet initiated or concluded their impact assessment of the changes mandated by the European Market Infrastructure Regulation (EMIR) and the Dodd-Frank Act, whereas this year that figure stands at 36% – though 21% of respondents said they have yet to launch an impact study.

This year only 10% of respondents said they believed they would not be impacted at all, down from 22% the previous year.

Other key findings in the survey included:

  • Two-thirds (67%) of insurers surveyed expect to participate in the new OTC cleared environment, up from 53% a year ago
  • Compared to last year, fewer respondents (29%, down from 50% last year) believe their organisation will increase its use of derivatives in the coming year
  • The repo market is seen as the most attractive mechanism to optimise collateral and gain additional yield from investment portfolios

Paul Traynor, Head of Insurance, Europe, Middle East & Africa at BNY Mellon, said: "While more firms are working towards operational readiness, a fifth of those surveyed are yet to conduct their impact assessment and may therefore not be attending to these implications. It is critical for insurers to conduct the necessary assessment as soon as practicable to allow them to plan appropriately for future growth. Indeed, the fall in comfort levels around collateral held that was noted in the survey may be because insurers are now further along in their investigations."

Kurt Woetzel, Head of Global Collateral Services at BNY Mellon, said: "Collateral was always important when it came to obtaining credit, but it is fast becoming the sole determinant of institutions' ability to engage in financial transactions in the cash or derivatives markets. There is a clear expectation that ongoing regulatory reforms we are seeing around derivatives and capital will result in collateral and liquidity shortfalls, as well as increasing both funding costs and operational complexity. Accordingly the demand for fresh thinking and innovative solutions around collateral, notably around aggregation and optimisation, has never been higher."

*Based on estimates of global insurance assets of $24.4 trillion at December 31, 2011 (source The City UK)