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Collateral Management


Collateral Management Overview of the International Regulations Luigi Concistre Banca d Italia/ Italian Embassy in Moscow Collateral Management Collateral ... – PowerPoint PPT presentation

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Title: Collateral Management

Collateral Management Overview of the
International Regulations
  • Luigi Concistre
  • Banca dItalia/ Italian Embassy in Moscow

Collateral Management
  • Collateral Management, an area, once seen as an
    ancillary, is now seen as a thoroughly
    main-stream and important regulatory compliance

Collateral Management
  • 1. Evolution of Collateral Management Why?
  • 2. Different legal and regulatory frameworks
  • 3. Collateral Management
  • 4. Framework in the Eurosystem

1. Evolutions of collateral management Growing
  • Before the collapse of Lehman Brothers in 2008,
    the markets had been relatively free of turmoil
    and liquidity was both plentiful and easily

Collateral Management Growing importance
  • This change was brought about by two main
    identifiable factors.
  • First, the concept of trust in the interbank
    markets evaporated financial institutions were
    swept up in the flight to quality phenomenon,
    hoarding their high-grade and liquid collateral
  • Second, regulators around the world began to
    address the difficult task of restoring public
    confidence in the financial sector.

Collateral Management
  • Collateral was viewed as both a solution to and a
    trigger of massive financial losses that occurred
    as a result of the financial crisis of 2008.
  • The regulatory reforms triggered by the current
    crisis have, among other things, resulted in an
    increase in demand for collateral. The regulatory
    reforms have taken different paths.

Collateral Management
  • The financial crisis has been a driver for
    central banks to adjust their eligibility
    criteria for collateral, as have market
    developments which have urged a shift from
    unsecured to secured funding and thereby greater
    use of collateral.
  • Meanwhile, financial regulators worldwide have
    cooperated on the topic of regulatory reform to
    address flaws in the financial sector, in
    particular as regards liquidity and risk
    management. I
  • In view of these developments, internationally
    active financial institutions are faced with
    complex and often diverging collateral
    requirements across borders and frameworks.

Collateral Management Growing importance
  • OTC derivatives were identified by regulators as
    an unquantifiable and thus unacceptable source of
  • To address the issue, an attempt was made to
    tackle the problem by requiring the bulk of OTC
    derivatives trading to occur within the -
    arguably - safe confines of a risk-averse central
    counterparty (CCP) serving as an intermediary and
    risk-centralising agent, governments hoped to
    quantify and thus exert a degree of control over
    the risks impacting the capital markets

Collateral Management Growing importance
  • G20 Evolution
  • Mandatory clearing
  • BCBS internationally consistent, risk sensitive
    rules for capital treatment for banks engaged in
    shadow banking activities - mitigate banks'
    interactions with shadow banking entities.
  • FSB - recommendations on minimum standards on
    methodologies for calculating haircuts on
    non-centrally cleared securities, developed
    information-sharing process within its policy
    framework for shadow banking, and proposed
    standards for global data collection regarding
    repo and securities lending markets.

Collateral Management different approaches
  • Central bank collateral frameworks broadest
    eligibility criteria
  • 2. Under the regulatory prudential frameworks
    es. European Market Infrastructure Regulation
    (EMIR) in the EU and the Dodd-Frank Act (DFA) in
    the US, as well as the Committee on Payment and
    Settlement Systems and International Organization
    of Securities Commissions (CPSS-IOSCO) principles
    for financial market infrastructures (PFMIs) and
    Basel III at global level more restricted types
    of assets are deemed eligible.
  • 3. CCP frameworks are the narrowest of the
    frameworks considered as regards acceptable
    margin collateral.

Central Banks
Regulatory Frameworks
Regulatory Frameworks (continued)
Regulatory Frameworks (continued)
CCP Frameworks
(No Transcript)
CCP rules
Collateral Management
  • Differences in the collateral frameworks
  • type of assets accepted as collateral
  • collateral denominated in foreign currency
  • additional requirements for collateral

Collateral Management
  • type of assets accepted as collateral
  • almost all frameworks accept debt securities
    issued by central governments/central banks and
    cash, with covered bonds also being accepted in
    many frameworks. Other marketable assets such
    as debt securities issued by credit institutions,
    as well as corporate bonds and asset-backed
    securities are accepted mainly in central bank
    frameworks, while equities, bank guarantees and
    gold are generally only eligible within some
    regulatory frameworks and only to a certain
    extent, as well as for the margin collateral of
    some CCPs and for non-centrally cleared
    over-the-counter (OTC) derivatives.

Collateral Management
  • 2. collateral denominated in foreign currency
  • These assets are accepted by all central bank
    frameworks considered (although in certain cases,
    they are only accepted on a very limited and
    temporary basis) and for the margin collateral of
    CCPs. Regulatory frameworks take restrictive
    approaches to accepting assets denominated in
    foreign currencies, only allowing the use of such
    assets for CCPs if the respective CCP is able to
    manage the risk related to the currency and the
    collateral is limited to the currency in which
    the CCP clears contracts. In general, only major
    or regionally linked currencies are accepted.

Collateral Management
  • additional requirements for collateral
  • minimum credit rating and/or guarantees from
    central government.
  • valuation haircuts may be applied.
  • Distinctive similarities and differences can be
    found in the following requirements. First,
    minimum credit standards are broadly established
    by many central banks and CCP frameworks,
    although reliance on external ratings is
  • In general, the range of credit standards
    accepted differs across frameworks. Second,
    minimum haircuts apply to most frameworks, but
    with levels differing according to the type,
    maturity and creditworthiness of the collateral

Collateral Management
  • Harmonisation/ Diversification
  • a certain degree of diversification across the
    collateral frameworks may be seen as a positive
    element that enhances resilience, provided that
    some conditions are met in relation to the
    transparency of the collateral frameworks,
    clarity of regulatory requirements and
    availability of collateral.

Collateral Management
  • Transparency
  • Important that
  • transparency on the different frameworks is
    provided on an ex-ante basis and that such
    information is kept as up to date as possible
  • 2. regulatory frameworks are clear
  • 3. authorities provide guidance where needed is
    important for the acceptance of collateral
  • Major differences in the interpretation of what
    is meant by highly liquid or highly reliable
    may lead to major discrepancies in the risk
    management framework that would not necessarily
    be justified.

Collateral Management
  • The existence of different collateral
    requirements also increases the need to have
    effective procedures for enhancing collateral
    availability, such as the development of links
    and interoperability, as well as for collateral
    transformation services. While the latter can
    help in having collateral available where needed,
    they also have the potential to create new risks
    and instability.

Collateral Management
  • Collateral transformation services are mainly
    being developed to transform ineligible
    collateral into eligible collateral (e.g.
    enabling participants to borrow government debt
    securities against corporate bonds or other
    collateral, which could then be accepted as
    collateral by a CCP).
  • Different types of underlying transaction could
    be involved in these collateral transformation
    services, e.g. securities lending, repos, swaps,
  • Additionally, simultaneous transactions could be
    conducted, or two independent transactions could
    take place (e.g. involving a repo anda swap).

Collateral Management
  • Haircut practices, such as valuation haircuts,
    differ across collateral frameworks and also
    tend to change (e.g. in times of market stress).
    Haircuts differ because of the need to balance a
    number of elements, such as the soundness of the
    collateral taker or collateral giver, the
    availability of adequate collateral and the need
    for flexibility to adapt to changing market
    conditions. In addition, regulatory requirements
    have been introduced regarding haircuts.

Collateral Management Growing importance
  • Main Problem
  • collateral scarsity (??)
  • maybe not..
  • the real problem is collateral fragmentation

Collateral Management Growing importance
  • The prevailing collateral theory of supply
    being sufficient to meet demand depends on firms
    being able to source their inventories in a
    centralised and efficient manner. Unfortunately,
    the capital markets are far from perfect and
    there is genuine concern that there will be
    mismatch between where the high-grade collateral
    is held and where it is needed

Collateral Management Growing importance
  • The need for centralised inventory management to
    meet an increasing number of cross-border
    collateral demands has begun in earnest.
  • A new holistic approach to inventory management
    with coverage across collateral silos and
    geographic locations is becoming the new norm as
    capital market participants strive to ensure no
    asset in their inventories sits idle.
  • The only way to survive, is to make all
    available capital reserves sweat i.e. fully
    utilise their potential

Collateral Management Growing importance
  • Lenders have resorted to asking for, and
    getting, more complex collateral schedules as an
    alternative to receiving highly rated securities
    collateral to secure their loans.
  • This has led to the propagation of the
    collateral upgrade services which have long
    been a staple of the capital markets. Most repos
    are nothing more than an upgrade or a
    bond-borrowing transaction. Under normal market
    conditions, such transactions happen all the time
    and in great quantity

Collateral Management Growing importance
  • The systemic risk implications of collateral
    upgrade trades during distressed market
    conditions are now getting the attention of the
    regulators and rightly so.  Will they recommend
    or mandate that securities lending transaction
    also require a CCP, just as they have done for
    OTC derivatives?  Our guess is that the
    transparency they seek through more frequent
    and regular reporting of transactions like
    securities lending upgrade trades will be the
    first mandatory step in that direction, meaning
    that central trade repositories for securities
    lending may well be making their appearance in
    the not-too-distant future.

Collateral Management in the Eurosystem
  • The CCBM
  • The correspondent central banking model was
    introduced in January 1999 in order to ensure
    that all assets eligible for Eurosystem credit
    operations could be used as collateral by all
    Eurosystem counterparties, regardless of the
    location of those assets or counterparties.

Collateral Management in the Eurosystem
  • Eligible links between SSSs (i.e. links
    considered to meet the ECBs standardsas regards
    the use of EU-based SSSs in Eurosystem credit
    operations) constitute an alternative to the CCBM
    for the cross-border use of marketable assets.
  • Though the use of links has increased over the
    years, these have played only a secondary role.

Collateral Management in the Eurosystem
  • Eurosystem counterparties may obtain credit from
    the NCB of the Member State in which they are
    established (their home central bank or HCB)
    by making use of eligible assets located in
    another euro area country.

Collateral Management in the Eurosystem
  • Since its introduction, the CCBM has been the
    main channel used for the cross-border delivery
    of collateral in Eurosystem credit operations.
    The value of cross-border collateral transferred
    via the CCBM has, with some variation, increased
    over the years, standing at 163 billion in
    December 1999 and 569 billion in December 2009.
    In December 2009 the CCBM accounted for 25.1 of
    all collateral transferred to the Eurosystem in
    value terms.

Collateral Management in the Eurosystem
  • the Governing Council of the ECB decided in March
    2007 to review the Eurosystems collateral
    management procedures particularly the CCBM. A
    medium-term project to establish the next
    generation of collateral management was then
    launched in July 2008 under the name Collateral
    Central Bank Management.

Collateral Management in the Eurosystem
  • The CCBM only provided for the cross-border
    delivery of collateral, while each national
    central bank had its own procedures for the use
    of domestic collateral. The scope of CCBM2 went
    beyond that of the CCBM, as it aimed to establish
    efficient procedures for the mobilisation and
    management of collateral for both domestic and
    cross-border use.

Collateral Management in the Eurosystem
  • The main objectives of CCBM2 was to increase the
    efficiency of the Eurosystems collateral
    management and address the drawbacks identified
    by market participants with regard to the CCBM
    framework, to the extent that these fall within
    the remit of central banks. CCBM2 will be able to
    adjust to changes in the Eurosystems
    collateral and operational frameworks as well
    as market developments in a smooth and swift

From CCBM to CCBM2 what should have remained
  • Pooling management
  • auto-collateral at the CCD (in Italy Monte
  • Real time disposal of collateral and management
    of depository services
  • Possibility to use another bank for the transfer
    of collateral and/or the T2 settlement of
    monetary policy operations

CCBM2New Functions
  • harmonized interfaces for communication with the
    Eurosystem (SWIFT and the Internet, U2A and A2A)
  • monitoring of positions at the level of
    individual banks and banking group
  • ability to transfer guarantees, domestic and
    foreign, to foreign custodians chosen by the
    counterpartpart (removal of the repatriation
  • use of triparty cross-border services

Collateral Management Growing importance
  • In June 2010, It was introduced in Italy the
    pooling of callateral, based on the pledge.
  • It allows banks to provide guarranty to a
    plurality of financing operations
  • 1. Simplification of the back-office 2.
    Flexibility and optimization of the use of
    collateral 3. Simpler Dialogue with Supervisor

From CCBM to CCB2
  • The Governing Council of the European Central
    Bank (ECB) has decided to discontinue the
    preparations for the Collateral Central Bank
    Management (CCBM2) project in its current form.
    In the project detailing phase, a number of
    challenges in the field of harmonisation were
    identified and the Eurosystem has decided to
    address these issues first before proceeding
    further with a common technical platform. The
    existing Correspondent Central Banking Model
    (CCBM) for cross-border collateral management
    remains in place.

Eurosystem New Framework
  • The Eurosystem has concentrated on implementing
    the previously announced enhancements to
    Eurosystem collateral management services within
    the CCBM
  • 1. removal of the repatriation requirement from
    the CCBM
  • 2. support of cross-border triparty collateral
    management services.
  • Both enhancements has been introduced in the
    Eurosystem collateral management framework in the
    course of 2014. Furthermore, the Eurosystem will
    prepare for the support of T2S auto-collateralisat
    ion procedures.