Transcript Collateral management - lot

Collateral Management –
Overview of the International
Regulations
Luigi Concistre’
Banca d’Italia/ 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 framework
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 importance
Before the collapse of Lehman Brothers in
2008, the markets had been relatively free
of turmoil and liquidity was both plentiful and
easily acquired.
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 reserves.
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
risk.
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 riskcentralising 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
1. 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
CCP rules
Collateral Management
Differences in the collateral frameworks:
1. type of assets accepted as collateral
2. collateral
currency
denominated
in
foreign
3. additional requirements for collateral
Collateral Management
1.
•
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-thecounter (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
3. 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 diminishing.
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 assets.
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:
1. 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, etc.
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 ECB’s standardsas
regards the use of EU-based SSSs in
Eurosystem credit operations) constitute
an alternative to the CCBM for the crossborder 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 Eurosystem’s
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 crossborder 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 Eurosystem’s 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
Eurosystem’s
collateral
and
operational
frameworks – as well as market developments –
in a smooth and swift manner.
From CCBM to CCBM2: what
should have remained
• Pooling management
• auto-collateral at the CCD (in Italy: Monte
Titoli)
• 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
CCBM2:New 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
requirement)
• use of triparty cross-border services
Collateral Management: Growing
importance
POOLING
• 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
BENEFITS FOR THE BANKS
• 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-collateralisation
procedures.
Cпасибо!
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