FX Invest: Buy-side cautions on collateral

Buy-side want eligible collateral extended to equities

More than half of buy-side traders would like to see eligible collateral extended to include equities, according to a survey produced jointly by technology vendor Algorthmics and consulting company Chromozome Consulting, in June.

The survey reveals that the buy-side would like to use the assets already in their portfolios as alternatives to eligible collateral asset types such as cash, government or corporate bonds. Of the respondents, 55% would like to use equities and 32% a share of funds. However, central clearing counterparties (CCP) are likely to require cash and high-quality bonds.

Asked how CCPs would affect bilateral collateral activity, 56% of respondents expect to need more collateral and 25% expect to see more counterparties collateralised.

A quarter of respondents are interested in optimising collateral. At a time when the costs of collateral funding could increase, this comes as no surprise: optimising collateral offers a way of minimising collateral cost through efficient reuse of collateral balances. For the same reasons, 22% cite measuring concentration limits on collateral positions as a priority.

Just over half of respondents (54%) say they make weekly rather than daily margin calls – despite 84% using vendor or outsourced collateral management systems. The vendor notes weekly margining will not meet the requirement for more frequent margining in central clearing.
The companies polled 80 buy-side institutions globally, including asset managers, hedge funds, pension funds and custodians.

Of them, 75% had between 100 and 500 CSA pairs, 75% had portfolios in excess of 500 live OTC positions and 72% use initial margin with 50% or more counterparties.