LSE highlights collateral fight
18 June 2014 London
Image: Shutterstock
Access to collateral could become a challenge as firms see wider sources of liquidity and assets, an academic study published by the London School of Economics and Political Sciences (LSE) has revealed.
The study, supported by The Depository Trust & Clearing Corporation (DTCC), showed that a shortage of collateral is unlikely despite new global regulatory obligations and tighter risk controls mandating increased collateral requirements.
Written by LSE professors Ronald Anderson and Karin Jõeveer, The Economics of Collateral’s findings were based on a model of global collateral flows, which was developed specifically for the study.
The study showed that the supply of collateral will be sufficient to meet the demands expected as a result of worldwide regulatory reform and evolving market practice.
But the study cautioned that access to collateral and the ability for collateral to circulate freely across financial systems could become challenging as market participants seek sources of liquidity and assets.
As a solution, the study advised market participants and infrastructure providers to work together on technical solutions and processes that ensure streamlined access to collateral worldwide.
Anderson said that there has been “much debate on collateral shortage” and that their research has found the challenge “does not lie in the global supply of collateral in aggregate, but rather the accessibility of collateral across markers and participants”.
He added: “The search for new methods to alleviate bottlenecks and seamlessly allocate collateral is the next challenge for infrastructure providers and participants.”
“Collaboration between participants and infrastructure providers will be crucial to ensuring an efficient process.”
Managing director of strategy and business development at DTCC, Mark Jennis, commented: “In order to support the flow of liquidity and propel economic growth we must ensure that we develop solutions that increase collateral velocity and provide operational scalability.”
“We are actively working with market participants around the world and our peers to identify solutions that leverage global market infrastructure, while ensuring streamlined efficient access and processing of collateral worldwide.”
The study, supported by The Depository Trust & Clearing Corporation (DTCC), showed that a shortage of collateral is unlikely despite new global regulatory obligations and tighter risk controls mandating increased collateral requirements.
Written by LSE professors Ronald Anderson and Karin Jõeveer, The Economics of Collateral’s findings were based on a model of global collateral flows, which was developed specifically for the study.
The study showed that the supply of collateral will be sufficient to meet the demands expected as a result of worldwide regulatory reform and evolving market practice.
But the study cautioned that access to collateral and the ability for collateral to circulate freely across financial systems could become challenging as market participants seek sources of liquidity and assets.
As a solution, the study advised market participants and infrastructure providers to work together on technical solutions and processes that ensure streamlined access to collateral worldwide.
Anderson said that there has been “much debate on collateral shortage” and that their research has found the challenge “does not lie in the global supply of collateral in aggregate, but rather the accessibility of collateral across markers and participants”.
He added: “The search for new methods to alleviate bottlenecks and seamlessly allocate collateral is the next challenge for infrastructure providers and participants.”
“Collaboration between participants and infrastructure providers will be crucial to ensuring an efficient process.”
Managing director of strategy and business development at DTCC, Mark Jennis, commented: “In order to support the flow of liquidity and propel economic growth we must ensure that we develop solutions that increase collateral velocity and provide operational scalability.”
“We are actively working with market participants around the world and our peers to identify solutions that leverage global market infrastructure, while ensuring streamlined efficient access and processing of collateral worldwide.”
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