3 Jan 2013
The article ‘Collateral upgrades “more likely” to be repo’ discusses the likelihood of an increase in the volume of repo trades following an increase in the demand for collateral transformation services in light of recent OTC derivative regulation. David Field (Executive Director, Rule Financial) is referenced heavily throughout the piece.
‘It is becoming clear that collateral transformation is likely to take a different shape from the non-cash to non-cash trade that some clearing brokers were envisaging a year or so ago. It is much more likely that collateral eligibility transformation will happen via non-cash to cash transactions, which is more or less the definition of the repo market’ observed David.
‘This opens many more choices to the buy-side firm for where transformation can be effected, with more price options, and therefore narrower spreads. Some asset managers may even set up their own repo desk for this purpose.’
David expressed concern at the emergence of such a trend commenting that the expansion of the repo market could increase systemic risk as, unlike securities lending trades, it is not mandatory to centrally clear repo trades. However, regulators are unlikely to respond to this potential threat as, ‘clearing brokers have enough change to deal with in 2013 already without adding discretionary projects such as clearing client repo business. So as the regulators mallet comes down hard on risks in the clearable OTC market, new risks will pop up in the un-cleared repo market.’
The article also discusses David’s identification of a ‘collateral ecosystem’ that links all market participants, enabling some institutions to thrive whilst other suffer a lingering decline.
To read the original article on the Global Investor website click here