New collateral challenges

Transcription

1 New collateral challenges Alexandre Gautier Director of Market Operations Department - Banque de France alexandre.gautier@live.fr Paris Europlace 10 & 11 July 2013

2 New collateral challenges Shift in the demand for collateral A demand on the rise Cyclical and structural factors Market responses Issues to be addressed Market initiatives Risk implications and role of public policies Old and new sources of risks implications for public policies

3 A demand on the rise : funding Long term Secured bonds outstanding in Europe Short term Secured and unsecured loans, daily average volume EUR bn Germany Spain Denmark France UK Netherlands others Unsecured loans Secured loans In 2012 secured issuances reached 45% of European issuances. Unsecured ones have decreased by 20% since2008. Over the last few years, unsecured loans have been halved while secured ones have doubled.

4 A demand on the rise : recourse to CCPs IR derivatives Notional outstanding: 380 trillion USD Feb 2013 Cleared through CCPs: % end 2012, % end 2011 Credit derivatives Notional outstanding 22 trillion USD Feb 2013 Cleared through CCPs : % end 2012, unchanged Equity-linked and commodity derivatives Notional outstanding: 10 trillions USD Feb 2013; Cleared through CCP: N/A

5 New collateral challenges Shift in the demand for collateral? 2 main drivers Cyclical factors Structural factors

6 Cyclical factors Liquidity risk Mrds Refinancing and liquidity surplus déc. 11 févr. 12 avr. 12 juin 12 août 12 oct. 12 déc. 12 févr. 13 avr. 13 Pt base Refinancing (left scale) Spread Eonia-Key rate (right scale) Lliquidity surplus(left scale) Counterparty risk

7 Structural factors : regulatory changes OTC derivatives : Higher incentives to resort to Central counterparties clearing Increase of margin requirements for residual non-centrally cleared derivatives Basel 3 RWA changes : incentives to reallocate ressources to securities that are less equity consuming e.g. secured bonds The LCR framework requires high quality liquidity assets holding Solvency II : incentives to invest in secured bonds (covered bonds) Resolution framework: bail-in exemption for secured debt Impact?

8 New collateral challenges Answer to new collateral issues?

9 What issues to be addressed? No overall supply/demand imbalance Expected supply and demand in the Eurosystem for 2014 (EUR bn) Supply Demand Collateral excess until 2014 Collateral excess until 2014 Quasi High quality collateral High quality collateral Repo market Derivative OTC Market Short term B3 liquidity ratio Central bank use Source : RSF Banque de France Houben et Slingenberg, information tirée de Level et Capel, 2012

10 What issues to be adressed? But allocation issues are significant

11 Market initiatives: Collateral management optimization Transforming collateral and intensifying its usage Collateral transformation: short term swaps of securities with different quality/liquidity features to meet margin calls requirements Triparty Repo services : Easier collateral mobilization : - Selection of the best collateral by the tripartite agent, allowing the collateralisation of assets that would not be used in bilateral transactions - Automatic and high frequency substitution, hence increasing the intensiveness of collateral use.

12 Market initiatives: Collateral management optimization Transforming collateral and intensifying its usage Triparty repo management in Paris Where are we? Increased competition between stakeholders and market places in Europe Triparty management services were initially offer by international central securities depository (Euroclear Bank et Clearstream Luxembourg), 2007 : implementation of Euro GC Pooling by Eurex/Clearstream, 2014 : deadline set by the Eurosystem for opening triparty services on a crossborder basis Since 2010: implementation of an integrated triparty management service With central counterpaty clearing (LCH.Clearnet SA), Banque de France refinancing Securities delivery versus payment State-of-the art standards regarding automation and operational security (straightthrough processing). Implementation between November 2011 and H2 2013

13 Market initiatives: revitalising securitisation Revitalising securitisation Yearly issuance and outstanding amounts, USD bn USA UE Issuance Oustanding Issuance Oustanding Données au 6 mai 2013, source Dealogic

14 Market answers: collateral potential enlargement Revitalising securitisation: the credit claims collateralization project Banque de France and Paris banking community are preparing a new securitisation vehicle. The securities will be available as collateral for the Eurosystem, for interbank market operations or for final investment (e.g. insurance). The vehicle can be duplicated in other jurisdictions.

15 A convincing business case 15

16 Main features of the vehicle A simple instrument Single Purpose Vehicle Eligible CC only Rating transparency: portfolio lookthrough approach Non-securitisation Overcollateralisation Assets* Liabilities Credit claims from = Security ISINs X Bank 1 Standard legal documentation CC from Bank 2 = Security ISINs Y Flexibility of the documentation set up** CC from Bank 3 = Security ISINs Z Easy mobilisation CC from etc = Security ISINs etc *Transfer on the balance sheet depends on the applicable legal basis for the credit claims transfer. ** Features and legal documentation of the vehicle can be adjusted in order to embed eligibility requirements. No tranching 16

17 Main features of the vehicle A safe and standard instrument Economic, operational and legal rationales create a comprehensive framework to increase loan portfolios monetisation 17

18 Current status of works Project s implementation increases credibility for Eurosystem s eligibility Eurosystem eligibility of securities: a key target for the project 18

19 New collateral challenges Role of public policies

20 Implications for public policies Promotion of transparency Proper calibration of regulations fuelling demand for collateral Strengthened standards for securities financing markets Revision of the securitisation framework

21 Conclusion Structural increase of collateral demand may exacerbate distribution problems Market responses should contribute to address the issue But risks implications need to be properly addressed both by market participants and by appropriate public policies.