EU watchdog to monitor risks from collateral use

LONDON Thu Feb 14, 2013 5:03am EST

LONDON Feb 14 (Reuters) - The European Union's markets watchdog said it will monitor the use of collateral as tougher derivatives rules make it relatively scarcer and tempt some banks to use lower quality assets.

The findings in the European Securities and Markets Authority's (ESMA) first report on trends, risks and vulnerabilities in the 27-country bloc's markets, will weaken industry claims that a collateral crunch is looming.

ESMA estimates that Europe will need an extra 2.44 trillion euros in collateral for 2014, and that supply will rise by 0.85 trillion euros between end 2012 and 2014.

The supply of collateral would still be 6.1 trillion euros higher than demand in 2014, ESMA estimated.

"In view of the potential financial stability risks linked to relative collateral scarcity, the availability and use of collateral needs to be monitored. The availability of collateral will thus remain a concern for a while," ESMA said.

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