Global Collateral Study Warns of Challenges

A study produced by the London School of Economics and Political Science (LSE) and supported by The Depository Trust & Clearing Corporation (DTCC) finds that while new global regulations and tighter risk controls are unlikely to create a shortage, access to collateral could become a challenge as firms seek wider sources of liquidity and assets.

The LSE study by Ronald Anderson and Karin Jõeveer, entitled ‘
The Economics of Collateral’
, finds that the supply of collateral, in principle, will be sufficient to meet growing demands expected as a result of regulatory reform and evolving market practice worldwide.

However, the study cautions that access to collateral and the ability for collateral to circulate freely across the financial system could become challenging as market participants seek sources of liquidity and assets worldwide. This limited access to collateral can be attributed to regional and product-focused market infrastructure, varying regulatory policies across markets, fragmentation at firm-levels and across local jurisdictions, and cross central counterparties (CCP) product specialisation.

The study urges market participants and infrastructure providers to work together on technical solutions and processes that ensure streamlined access to collateral worldwide. Otherwise, the authors warn, collateral demand, whether for clearing or regulatory capital requirements, could prove challenging to satisfy.

“For several years, there has been much debate on a collateral shortage. Our research has found that the challenge does not lie in the global supply of collateral in aggregate, but rather in the accessibility of collateral across markets and participants,” said the LSE’s Professor Anderson.

“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.”


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