By Huw Jones
LONDON Feb 14 The European Union's markets
watchdog will monitor the use of collateral as tough rules
forcing banks to hold more in order to make derivatives markets
safer are prompting some lenders to warn there may not be enough
quality holdings to go around.
Collateral refers to cash and assets such as government
bonds which parties to a derivatives trade post as security. The
aim of the reforms is to avoid another situation like that when
derivatives-laden Lehman Brothers crashed in September 2008 with
little visibility about how far their debts would impact others.
"In view of the potential financial stability risks linked
to relative collateral scarcity, the availability and use of
collateral needs to be monitored," said the European Securities
and Markets Authority in its first report on trends, risks and
vulnerabilities in the 27-country bloc's markets.
"The availability of collateral will thus remain a concern
for a while," it said.
However ESMA estimated that the supply of higher-quality
collateral was estimated at 11.8 trillion euros in Europe last
year, against demand at 4.1 trillion euros - weakening some
claims from industry that a collateral crunch is looming.
The International Swaps and Derivatives Association, a trade
body, has said regulators may be "overshooting and creating a
collateral crunch" with the new, tougher derivatives rules.
ESMA estimates that Europe will need an extra 2.44 trillion
euros in collateral for 2014 as a result of the new regulations,
and that supply will rise by 0.85 trillion euros between end
2012 and 2014.
But the supply of collateral would still be 6.1 trillion
euros higher than demand in 2014, ESMA estimated.
However, ESMA did acknowledge that demand is "ramping up"
and that could push up the price of high-quality assets and
market participants would turn to using lower-quality assets
such as shares or exchange-traded-funds, it said.
Global regulators said on Wednesday they are taking more
time to finalise the derivatives rules, partly because of
concerns over collateral supply.