Cross-border collateral arrangements

Cross-border collateral arrangements

1. Cross-border use of collateral

   • Key factors influencing the demand for cross-border use of collateral
     • Evolutionary factors, risk management and the market microstructure
       • globalisation has spurred increased cross-border flows, market participants’ management
       • banks operating across borders may, face a heightened liquidity and collateral management challenge.
       • demands can come from the need to fund payments at specific times
         • Continuous Linked Settlement (CLS)
     • Offsetting factors
       • RTGS and DVP settlement
         • help to mitigate liquidity risk pressures
       • The continuing globalisation and consolidation trend within the financial sector
         • might itself contribute to a relaxation of the pressure on collateral demand
       • communication protocols (mainly based on SWIFT technology)
         • has already led to considerable progress in the implementation of crossborder straight through processing (STP)
   • The current environment
     • central banks
       • Some central banks already accept cross-border collateral and have adopted a wide range of approaches to accepting such assets.
       • The arrangements implemented have been carefully designed and analyzed before Possible identified risk implications and risk mitigation measures taken when appropriate
       • "foreign" markets become increasingly blurred and you could talk about practically a single
       • Cross-border agreements are not widely used
     • Eligible collateral in the G10
       • there is no obvious shortage of eligible assets to back routine requirements for intraday and overnight central bank credit in the G10 markets
       • At these much higher levels of utilisation, supply constraints might begin to emerge
       • constraints may arise at specific times, particularly in times of stress
     • Market infrastructures
       • securities transactions, including the mobilisation of collateral in cross-border arrangements, is based on two types of market organisation
         • international markets and domestic markets with an international dimension.
       • Most major market players opt for remote access to the ICSDs
     • Internationally active banks
       • often large in monetary terms and can be significant in terms of the flow of liquidity
       • The degree of centralisation of the liquidity and collateral management function tends to be driven by one or more of several factors:
         • cost efficiency; the legal form of the foreign entities; local regulatory factors; technological capacity and the integration of IT systems across the banking group; and a bank’s particular contingency arrangements.

2. Policy considerations

   • Global systemic risks
   • Monetary policy
   • Smooth functioning of payment and settlement systems
   • Effect on competition
     • Effects on individual institutions and correspondent banking
     • Effects on the currency area
     • Effects on financial markets
   • Legal constraints
   • Other constraints for central banks

3. Arrangements for the use of foreign collateral in intraday/overnight credit operations

   • Five stylised arrangements for the use of cross-border collateral
     • Correspondent central banking model
     • Guarantee model
     • Links between securities settlement systems
     • Remote access to a securities settlement system
     • Recourse to a collateral management system (CMS)
   • Analysis of the alternative arrangements
     • Criteria for assessment
       • Processing speed
       • Accessibility of the arrangement:
       • Overcoming time zone frictions:
       • Geographical coverage
       • Resilience and risk management
       • Knowledge/staffing
       • Acceptability to market participants/economic feasibility
     • Relevant factors in assessment against these criteria
       • Processing speed
       • Accessibility of the arrangement
       • Overcoming time zone frictions
       • Geographical coverage
       • Resilience and risk management
       • Knowledge and staffing requirements
       • Acceptability to market participants/economic feasibility

4. Potential central bank actions

   • Areas for potential cooperation and coordination among G10 central banks
   • Acceptance of additional categories of foreign collateral
   • Improving cross-border collateralisation practices
     • Legal issues
     • The availability of systems
   • Promoting interoperability