Sovereign funds and central banks step up to supply collateral

Sovereign funds and central banks step up to supply collateral

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Sovereign wealth funds and central banks are emerging as large scale providers of collateral, BNY Mellon finds, providing a vital liquidity boost to the global financial system.

Two dozen sovereign institutions with more than $2tn in assets under management took part in the global custodian's study, done in partnership with the Official Monetary and Financial Institutions Forum (OMFIF).

Over a third (37%) of those polled said they are in advanced stages of considering collateral trades or already implementing them, and 66% reported that enquiries from potential counterparties in the trades were increasing.

“Collateral is becoming the sole determinant of institutions’ ability to engage in financial transactions in the cash or derivatives markets," said Hani Kablawi, chief executive officer of BNY Mellon’s Asset Servicing business in EMEA.

The report 'Crossing the Collateral Rubicon' highlights the impact of quantitative easing on collateral as central banks acquire large proportions of government securities, moving this desirable collateral away from traditional suppliers of liquidity such as banks and brokerage companies.

Falling oil prices have also impacted the collateral market according to the study, with demand for collateral trending up in energy supplying nations.

“In the current environment of low oil prices, the liquidity framework becomes more important so investment activity can continue," said one chief risk officer from a Middle East sovereign fund.

"We must make sure the liquidity profile is appropriate, prioritising liquidity over returns. In the future, maintaining the liquidity management framework is the key.”

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