There is no collateral shortage, says Finadium
13 December 2012 Massachusetts
Image: Shutterstock
Finadium has released a new report on the mechanics and sizing of the collateral transformation trade.
“Collateral transformations are a potentially important means for banks and OTC derivative end-users to access securities for bank balance sheets and posting collateral,” said the firm.
“This trade, where cash or government bonds are exchanged for a "lower" credit asset such as corporate bonds or equities, could lift securities lending and repo markets while providing a valuable service. However, the trade is not without its hurdles, namely the economics and number of willing and able participants.”
Finadium stressed that it had found no absolute collateral shortage, but the economics of collateral transformations suggest that more demand will emerge as central counterparties, non-cleared derivatives and banks each have their own requirements.
Its pricing analysis versus outstanding assets shows a mismatch relative to the perceived risk of the transaction, and it said that expected winners and losers are already emerging among asset holders, cash providers, securities lending agents, banks and repo desks.
“Collateral transformations are a potentially important means for banks and OTC derivative end-users to access securities for bank balance sheets and posting collateral,” said the firm.
“This trade, where cash or government bonds are exchanged for a "lower" credit asset such as corporate bonds or equities, could lift securities lending and repo markets while providing a valuable service. However, the trade is not without its hurdles, namely the economics and number of willing and able participants.”
Finadium stressed that it had found no absolute collateral shortage, but the economics of collateral transformations suggest that more demand will emerge as central counterparties, non-cleared derivatives and banks each have their own requirements.
Its pricing analysis versus outstanding assets shows a mismatch relative to the perceived risk of the transaction, and it said that expected winners and losers are already emerging among asset holders, cash providers, securities lending agents, banks and repo desks.
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