Buy-Side Fears Over Europe to Increase Collateral Shortage

Europe’s collateral pool could be increasingly depleted as asset manager’s move away from holding certain government bonds, reflecting the growing impact of front-office decisions on post-trade operations.

The potential exit of Greece from the EU, as well as the debt crises in Italy, Spain and Portugal, has resulted in many buy-siders moving away from holding debt issued in these countries, and instead holding bonds considered to be less at risk such as German bonds.

According to a joint study issued by Euroclear and Aite Group: “This further decrease the available collateral pool because of behavioral factors based on the market perception of potential stability of individual national economies.”

The survey also highlights the increasing number of sovereign downgrades and a lack of sovereign upgrades as a significant challenge to collateral supplies, as it directly impacts the amount of government bonds deemed to be high quality.

“The fewer the number of AAA-rated sovereign bonds, the scarcer collateral becomes because institutions hold onto the remaining high-quality assets for longer due to fears of a collateral shortage. Much like the reaction to a possible Grexit, these activities are often exacerbated by behavioral factors.”

Behavioral factors amongst the front-office could therefore significantly affect back-office operations such as collateral management.