Today, SIX Securities Services, the post-trade services provider, has released data from a new collateral management study, revealing that over a third (35%) of financial institutions believe that it is acceptable for collateral to be low quality, complex and opaque, so long as it is cheap.
- 43% believe that collateral should be simple, high quality, liquid and easy to value
- 57% think that price of collateral is more important than quality
- 35% think that it is acceptable for collateral to be low quality, complex and opaque, so long as it is cheap
SIX Securities Services’ research also finds that 53% of financial institutions estimate that high grade collateral will increase in cost by about 9% before 2015.
In the race to find collateral, 48% of respondents agree that securitising and repackaging existing portfolios to create new collateral pools will result in additional risk and sow seeds for the next crisis.
Robert Almanas, managing director for international services, SIX Securities Services, comments: “It is a frightening prospect that in today’s market, over a third of financial institutions are willing to accept collateral simply because it is cheap.
“When our competition begins to compete on the quality of collateral they are prepared to take, the ‘race to the bottom’ becomes a very real outcome. Fair competition should revolve around responsive, real-time platforms and excellent client service supported by appropriate regulation – not reliance on a dilution in what is considered to be high quality collateral.
We believe that collateral should be simple, of high quality, liquid, and easily-valued – these ‘Collateral Values’ are fundamental to the future success of the financial markets.
“I am not convinced that we have enough quality collateral to keep the capital markets functioning, not just as efficiently as possible, but also in a safer manner than in the past. But repackaging lower quality, existing securities that are readily available is not the solution. Instead we must look to effectively mobilise collateral. To achieve this, the whole chain has to work, allowing the creation of a virtual pool across markets to eliminate the inefficiencies inherent in having to transfer securities across systems. It is therefore crucial that collateral can be valued across multiple time zones, systems, and currencies – a fundamental shift in the current collateral infrastructure.”
SIX Securities Services’ study of financial institutions was carried out in December 2012. The research was conducted by Vanson Bourne and based on telephone interviews with 60 industry participants across the UK, France and Germany (evenly split across the three regions).
The financial institutions interviewed were 55% buy-side intuitions and 45% sell-side. Of the buy-side institutions interviewed, the average assets under management (AuM) was £56.7 billion.