Sovereign institutions emerging as major collateral players

Sovereign wealth funds and central banks are playing an increasingly large role in collateral provision according to a new study.

With quantitative easing programmes resulting in central banks acquiring significant amounts of government securities, sovereign institutions are well played to become providers of liquidity. At the same time these securities are well sought after for collateral trades.

The survey from BNY Mellon and the Official Monetary and Financial Institutions Forum (OMFIF) showed that 37% of sovereign institutions are in advanced stages of considering collateral trades or already implementing them.

A further 66% reported that enquiries from potential counterparties in the trades were increasing.

The researchers surveyed 24 institutions with more than $2 trillion in assets under management.

“Collateral is becoming the sole determinant of institutions’ ability to engage in financial transactions in the cash or derivatives markets,” said Hani Kablawi, chief executive officer of BNY Mellon’s Asset Servicing business in EMEA.

“Since the financial crisis, new regulations have placed a premium on counterparties gaining access to high-quality collateral. Yet, central bank macroeconomic policies have reduced the supply of collateral. This has produced a great challenge for markets and a large-scale opportunity for official holders of these securities such as sovereign wealth funds.”