Thursday 23rd October 2014
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THURSDAY TICKER: OCTOBER 23RD 2014: The governor of the Bank of England, Mark Carney, has launched a probe into the causes of yesterday’s disruption to Real-time gross settlement (RTGS), the bank's system for settling high value payments - A major loophole in the UK’s criminal records checking system means that IT staff, including those working in critical functions within financial services firms are not permitted to be vetted for fraud, says Simon Culhane, Chartered FCSI and chief executive officer of the Chartered Institute for Securities & Investment (CISI) - Employment in financial and related professional services in London reached a record high of 703,900 in June 2014– 11%, according to TheCityUK’s October 2014 London Employment Survey - LSE-backed multilateral trading facility Turquoise has launched Block Discovery, a new service designed to allow users within the Turquoise Midpoint Dark Book to trade larger block orders by matching block indications - Dominic Wheatley will take up the job of chief executive of Guernsey Finance as of December 1st. Wheatley will replace Fiona Le Poidevin, whose resignation was announced in July and who will head up the Channel Islands Stock Exchange.

Rules could curb collateral movement, ICMA warns

Thursday, 03 April 2014
Rules could curb collateral movement, ICMA warns Regulators need to consider the impact of financial regulation on the movement of collateral according to a new study by ICMA’s European Repo Council. http://www.ftseglobalmarkets.com/

Regulators need to consider the impact of financial regulation on the movement of collateral according to a new study by ICMA’s European Repo Council.

The trade body has highlighted potential systemic risks of inhibiting collateral fluidity and the negative impact this could have on the stability and efficiency of capital markets.

A number of regulatory and market driven initiatives are in place to meet the challenges that currently constrain the efficient movement of collateral, including Target2-Securities, EU Central Securities Depository Regulation (CSDR) and tri-party settlement interoperability between ICSDs/CSDs.



However, according to ICMA’s study entitled 'Collateral is the new cash: the systemic risks of inhibiting collateral fluidity’, regulations such as the Basel III Leverage Ratio and the proposed EU Financial Transaction Tax (FTT) could prohibit the effective functioning of collateral markets.

For the markets, these regulations could mean less liquid secondary markets for securities, greater asset price volatility. Hedging, and the pricing and management of risk, could become more difficult. There may also be greater execution risks for investors.

Meanwhile the economy could suffer from reduced investment in capital and businesses, higher borrowing costs for governments, increased costs for corporate capital raisers and place more onus on central banks to support markets.

“If banks find it economically inefficient, or are restricted by regulation from supporting the critical functions of sourcing, pricing, managing, and mobilising collateral, and the infrastructure is not in place for the efficient mobilisation of collateral, then the basic intermediation roles of banks and financial markets - that of maturity, risk, and credit transformation - would be undermined,” says the study.

The proposed EU 11 Financial Transaction Tax (FTT), were it to be applied to securities finance trades, would severely impair the effective functioning of collateral markets. Another ICMA study suggests that the size of the European repo market could be reduced by as much as 66%, with the market effectively closed for transactions under six months’ maturity.

In addition, new Basel III capital adequacy requirements are making the balance sheets of banks more expensive. As a result, banks are having to rethink their business models and priorities. Low-margin, capital-intensive businesses, such as repo, are becoming less attractive.

“Sound regulation is essential for the efficient and stable functioning of the global funding and capital markets that support our economies,” says the IMCA’s report. “So is collateral. In this respect, regulation should not only avoid inhibiting collateral fluidity, but, where possible, it should aim to enhance it.

Godfried De Vidts, chair of ICMA’s European Repo Council, adds: “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.”

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