The International Capital Markets Association (Icma) has warned regulators about the systemic risks in restricting the movement of collateral in a new paper.
The report, Collateral is the new cash: the systemic risks of inhibiting collateral fluidity, found that the flow of collateral is correlated to the functioning of capital markets.
Icma flags the potentially negative impact that such risks could have on the stability and efficiency of capital markets.
"This paper will fuel constructive dialogue between the industry and its regulators and help market participants understand the interdependencies at work in the use of collateral, the cumulative effect of different regulatory proposals on its availability, and its role in the functioning of the financial system and in supporting economic growth.
"As we build the framework of new financial regulation for safer markets we should steer clear of embedding systemic risks which could contribute to future financial crises," said Godfried De Vidts, chair of Icma’s European Repo Council.
Regulatory measures such as Basel III affect the ability of bank funding desks to function effectively, the report found. As these desks act as intermediaries between providers and users of collateral, any restriction on their ability to operate could affect the movement of collateral.
Decreased collateral mobility has negative implications for secondary market liquidity, asset price volatility, hedging, trade execution and the pricing and management of risk.
Icma said that this would dampen GDP growth in the real economy through reduced investment in capital and businesses, higher borrowing costs for governments, increased funding costs for corporates, increased cliff-effect risks for pension and other institutional investment funds, and a greater reliance on central banks to support the markets.
Another barrier to mobility of collateral in Europe is fragmented cross-border settlement. New initiatives such as Target2-Securities and Central Securities Depository Regulation are aimed at solving this issue.