Green Bonds and Social Impact Bond

The CDB-Group Green Bonds and Social Impact Bond Conference series of events, held across three continents, are the recognised forums for industry practitioners to gather and share their insight into the present and future state of the collateral management eco-system.

For almost two decades, our conferences have promoted the highest level of dialogue across the different segments of our industry.

Negative interest rates, spread compression and year-end reporting deadlines are making banks look closely at balance sheet, liquidity and collateral optimisation.

The Liquidity Coverage Ratio (LCR) is already forcing banks to focus on short-term assets, and the introduction of the Net Stable Funding Ratio (NSFR) in 2022 will add an extra dimension to their ratio management.

According to some market practitioners, the keys to unlocking the puzzle of optimisation lie in improving collateral management while at the same time increasing levels of automation. As spreads compress there is a structural need for more collateral in the market. Many market observers believe that banks need to structurally change by centralising their collateral management to give better visibility on the whole collateral stack, as well as expanding the use of existing assets.

Different markets have different characteristics, which means that even with a central collateral stack, local differences must be taken into account. Between the US and Europe for instance, these differences call for differing collateral strategies.

Collateral and automation

Another popular trading strategy is reverse repos for cash balances. where companies come to the market to get a zero-return trade. This offsets initial margin and haircuts and is efficient for risk-weighted assets. It is, however, a European phenomenon and not yet commonly seen in the US.

Pension funds are also pushing increased demand for sponsorship and Total Return Swaps (TRS), which work well for equities and government bonds. The main problem with TRS, however, is that they are manually intensive and they need more automation to grow into a staple of the funding stack. If it can be automated, especially in the form of a triparty solution, then it will be highly applicable for banks to meet their funding ratios.

For automation to really bear fruit, there will need to be not only a proliferation of collateral platforms, but these will also need to be interoperable and easily onboarded onto bank’s platforms.

Banks looking to optimise their use of collateral therefore face a number of hurdles and it is clear that one size will not fit all, with banks in different markets having different requirements and access to different strategies. But the twin drivers of both balance sheet and liquidity ensure that collateral optimisation will remain at the forefront of their strategic thinking.