CASLA: Canada is underdeveloped and must rethink collateral approach
11 June 2024 Canada
Image: mandritoiu/stock.adobe.com
The Canadian market requires improvement, especially in terms of repo and collateral, according to panellists at the Canadian Securities Lending Association (CASLA) conference in Toronto.
The panel discussed post-trade challenges in the session entitled ‘Market Infrastructure Revolution: Navigating Post Trade Challenges and Partnering in Industry Transformation’.
Moderated by Steve Everett, head of business strategy and Post Trade Innovation at TMX, panellists agreed that the Canadian market requires improvements in the collateral space.
According to Nick Chan, managing director, head of financial resource management at BMO Capital Markets, “Canada is unique”.
“When I look at how we operate compared to other jurisdictions, we tend to come through things by collaboration, discussion and standardisation,” he added.
Triparty was not a term that was known to local Canadian participants until very recently, said Chan, who believes that this has come from “the fact that we have had good access to well-developed funding markets that did not rely on us to have much collateral reuse”.
During the discussions, Chan indicated that collateral has become a core part of the way the Canadian market manages risk. In the area of collateral reuse, he believes that “we have been underdeveloped, and there is an opportunity to evolve”.
He continued: “The Canadian market has been very resilient, but there is an opportunity for us to evolve the infrastructure to pave the way for more innovation and liquidity, which will lead to more Canadian market participation in the future.”
Following this topic, Maksym Padalko, operations and policy advisor at the Bank of Canada, highlighted that the country lacks a general collateral market. In addition, he stated that the term repo market could also “be more active”, and usage of Canadian collateral or securities in foreign markets, such as in the US and Europe, could be expanded.
“In terms of the importance of having the proper infrastructure, there are broad systemic benefits,” Padalko explained. “If you have a well developed term repo market, for example, and you face sudden volatility like what we have seen in the past, term repo markets can help to absorb some of those shocks — such as risks, big price moves and margin calls — in the near term.”
Adding to the debate, Value Exchange CEO Barnaby Nelson pinpointed how the “incredible costs” the industry carries everyday to support the current infrastructure in the collateral repo space, from a balance sheet, risk-weighted asset (RWA) and operational cost perspective, was “striking”. He asked: can we afford not to?
He concluded: “There is no way we can run our collateral and repos in 10 years in the same way that we do now. We are just entering the triparty era in Canada, arguably, the revolution is well advanced in Europe and Asia. It would be wrong to think we have the luxury of time.”
The panel discussed post-trade challenges in the session entitled ‘Market Infrastructure Revolution: Navigating Post Trade Challenges and Partnering in Industry Transformation’.
Moderated by Steve Everett, head of business strategy and Post Trade Innovation at TMX, panellists agreed that the Canadian market requires improvements in the collateral space.
According to Nick Chan, managing director, head of financial resource management at BMO Capital Markets, “Canada is unique”.
“When I look at how we operate compared to other jurisdictions, we tend to come through things by collaboration, discussion and standardisation,” he added.
Triparty was not a term that was known to local Canadian participants until very recently, said Chan, who believes that this has come from “the fact that we have had good access to well-developed funding markets that did not rely on us to have much collateral reuse”.
During the discussions, Chan indicated that collateral has become a core part of the way the Canadian market manages risk. In the area of collateral reuse, he believes that “we have been underdeveloped, and there is an opportunity to evolve”.
He continued: “The Canadian market has been very resilient, but there is an opportunity for us to evolve the infrastructure to pave the way for more innovation and liquidity, which will lead to more Canadian market participation in the future.”
Following this topic, Maksym Padalko, operations and policy advisor at the Bank of Canada, highlighted that the country lacks a general collateral market. In addition, he stated that the term repo market could also “be more active”, and usage of Canadian collateral or securities in foreign markets, such as in the US and Europe, could be expanded.
“In terms of the importance of having the proper infrastructure, there are broad systemic benefits,” Padalko explained. “If you have a well developed term repo market, for example, and you face sudden volatility like what we have seen in the past, term repo markets can help to absorb some of those shocks — such as risks, big price moves and margin calls — in the near term.”
Adding to the debate, Value Exchange CEO Barnaby Nelson pinpointed how the “incredible costs” the industry carries everyday to support the current infrastructure in the collateral repo space, from a balance sheet, risk-weighted asset (RWA) and operational cost perspective, was “striking”. He asked: can we afford not to?
He concluded: “There is no way we can run our collateral and repos in 10 years in the same way that we do now. We are just entering the triparty era in Canada, arguably, the revolution is well advanced in Europe and Asia. It would be wrong to think we have the luxury of time.”
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