Collateral

As the market in Europe prepares for the commencement of mandatory clearing, new clearing structures are being devised by CCPs (central counterparty clearinghouses) to make the process smoother, more cost efficient and, perhaps most pertinently, more collateral efficient for clients.

With increased demands being placed upon collateral, collateral management and optimisation has never been more important. Being able to source the right collateral at the right time is vital.

The way that collateral is being used, and indeed needed, in financial markets has altered significantly since the financial crises. With the central role handed to CCPs in markets, the majority of trades now need to be collateralised in one way or another.

Alongside the need to identify and contain risk is the need for efficiency and transparency in financial transactions. Greater efficiency and transparency will assist in the identification and subsequent containment of risk, making it easier to quell. If investors, buyers and sellers are able to make the most of their available resources, it will promote a healthy financial system.

The ever increasing demands on collateral in the post financial crisis regulatory landscape have, increasingly, called into question whether or not there is sufficient collateral of sufficient quality to safely and efficiently oil the cogs of the post-trade world. Collateral has taken centre stage and the industry, almost universally, has been discussing potential shortfalls prior to the implementation of key regulatory mandates such as central clearing of trades.

It is a clear goal in the post-2008 financial landscape to push towards risk mitigation and transparency. Mandates such as clearing and reporting are being phased in to ensure both pillars are built into financial markets, but how can they be guaranteed? Through the posting of collateral against trading activity.

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