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Icma warns on restriction of collateral mobility
03 April 2014
The association’s new paper flags potential systemic risks
The International Capital Markets Association (Icma) has
warned regulators about the systemic risks in restricting the
movement of collateral in a new paper.
The report, Collateral is the new cash: the systemic risks of
inhibiting collateral fluidity, found that the flow of
collateral is correlated to the functioning of capital
Icma flags the potentially negative impact that such risks
could have on the stability and efficiency of capital
"This paper will fuel constructive dialogue between the
industry and its regulators and help market participants
understand the interdependencies at work in the use of
collateral, the cumulative effect of different regulatory
proposals on its availability, and its role in the
functioning of the financial system and in supporting economic
"As we build the framework of new financial regulation for
safer markets we should steer clear of embedding systemic risks
which could contribute to future financial crises," said
Godfried De Vidts, chair of Icma's European Repo Council.
Regulatory measures such as Basel III affect the ability of
bank funding desks to function effectively, the report found.
As these desks act as intermediaries between providers and
users of collateral, any restriction on their ability to
operate could affect the movement of collateral.
Decreased collateral mobility has negative implications for
secondary market liquidity, asset price volatility, hedging,
trade execution and the pricing and management of risk.
Icma said that this would dampen GDP growth in the real economy
through reduced investment in capital and businesses, higher
borrowing costs for governments, increased funding costs for
corporates, increased cliff-effect risks for pension and other
institutional investment funds, and a greater reliance on
central banks to support the markets.
Another barrier to mobility of collateral in Europe is
fragmented cross-border settlement. New initiatives such as
Target2-Securities and Central Securities Depository Regulation
are aimed at solving this issue.