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Appeal of collateral downgrades at peak
28 May 2014
Lending high-quality bonds for lower-quality securities has never been more attractive, according to Swiss Re’s Richard Hochreutiner
The attractiveness of collateral downgrade trades
is probably at all-time peak, according
to Richard Hochreutiner, head of global collateral, Swiss
"The amount of additional revenue you can pick up by lending
government securities for lesser-quality securities in relation
to the yields on your five- or ten-year government bonds has
probably never been as attractive as now. On a relative basis
it will probably get less attractive than it is now."
Demand for high-grade government bonds has been rising as
top-quality collateral is required to post at central
counterparties when trading OTC derivatives.
Hochreutiner was speaking at the Euroclear Collateral
Conference in May.
Delegates at the conference had mixed views on whether
collateral transformation trades were yet a reality. More than
half (54%) said these transactions were already taking place as
more lending was being driven by regulation. Some 42% said they
did not see these trades occurring as it was "too early".
The definition of collateral transformation differs among
market participants. Some define it as a trade being
facilitated through the repo or securities lending markets in
order to meet the collateral requirements of centrally-cleared
derivatives while others say that collateral transformation is
not a new concept as securities lending and repo have been in
place for decades.
Click on the hyperlinked titles below to read more coverage
from the Euroclear conference:
Feeling the pressure in repo
Beneficial owners fear onerous regulation
Poll: regulation casts gloom on securities