TCS Capital Markets Forum | Saheed Awan Counting the pennies
The exact numbers for the collateral squeeze may vary, but there is no doubt that the buyside will face higher expenses. All other business factors being equal, it is likely that the lowest cost providers will win the collateral game, according to Saheed Awan, global head collateral management and securities financing products, Euroclear.
It’s painful and it’s hard right now for banks. There is no denying that. Trading floors are emptier, trade flows are low, and stock exchanges are seeing quarterly declines in volume; -40% on the New York Stock Exchange, with similar declines on Deutsche Börse. There is a lingering lack of trust and the regulators are piling on more pressure which is beginning to hurt business. The big question is how do you find opportunities in this environment? Everyone believes that the onslaught of
regulation will be good for collateral service providers. However, how can we identify and get our systems ready to take advantage of opportunities if the very experts – the regulators – don’t know the size of the problem? For example, the International Monetary Fund issued a forecast which says $2.2 trillion of collateral will be needed to reach the liquidity coverage ratios of Basel III. Meanwhile, the ISDA (International Swaps and Derivatives Association) came up with the most remarkable forecast – that collateral requirements post-regulation could range from $800 billion to $10.2 trillion, while other estimates put the maximum level of demand at a more modest $200 billion. Given that we are in the business of servicing the collateral needs of the industry, it is very difficult to determine how we should gear up when the projections range so widely. Another challenge is that it is hard to imagine a situation where the buyside – who we are all going to depend on as sources of collateral – is going to put up with the extra expense incurred by the new regulations. We are doing an exercise now to see what could be the end-to-end cost to source and mobilise collateral in this new environment.
Best Execution | Spring 2013
“The opportunity as well as the challenge we face is to make it easy for our clients to mobilise and use their assets as collateral in the most optimal way.”
In general though, I think the lowest cost
producers will win. The opportunity as well as the challenge we face is to make it easy for our clients to mobilise and use their assets as collateral in the most optimal way. Everybody talks about collateral optimisation; our definition is very simple – reduce the amount of risk-weighted assets that banks have on their balance sheets. Second, expand their funding capacity and give them access to liquidity to source their funding needs. The infrastructure and the assets are available. I
don’t think there is going to be a collateral crunch, but collateral is locked up in different silos. Our job is to help our investment bank clients and others to mobilise collateral wherever it is held and lower their funding costs. ■
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