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How Corporate Treasurers Can Cope with the Challenges of Collateral

by Anthony van Eden, Director: Strategic Projects – Strate

One of the functions of a corporate treasurer within a financial institution is to raise or manage working capital and invest surplus funds to support the business. Banks borrow from and lend to one another, and they normally place collateral for each of these bilateral agreements. Cash is a key component within the process, closely followed by liquidity management. However, in the near future, the introduction of new regulations aimed to protect the financial markets from systemic risk has raised concerns that legislation could place pressure on high-quality liquid assets, such as cash.

Regulations will impose stricter guidelines on how liquidity and risk is managed and the impact is being felt by both local as well as international institutions. Basel III, for example, requires banks to hold more regulatory capital (the minimum capital requirement as demanded by the regulators that a bank must hold in order to operate), as well as greater high-quality liquid assets on their balance sheet. Under these rules, which will be phased in by 2019, banks must hold sufficient liquid assets to cover all net cash outflows under a stress scenario for 30 days and be able to fund assets maturing after a year with stable funding sources. Similarly, Solvency II will be introduced to regulate insurers and call for increased solvency capital ratios. This affects the availability of cash in the market to be used as collateral on a market-wide basis.

In addition, the Group of Twenty Finance Ministers (G-20) recommends that all standardised OTC derivatives should be centrally cleared with central counterparties (CCPs). Central clearing of derivatives traded bilaterally in over-the-counter (OTC) markets is set to become more widespread. This would place CCPs between the counterparties of all such bilateral transactions, so they would become sellers to every buyer and buyers to every seller, and thus take on the counterparty credit risk of the bilateral trades. [1]