Appeal of collateral downgrades at peak

Appeal of collateral downgrades at peak

The attractiveness of collateral downgrade trades is probably at all-time peak, according to Richard Hochreutiner, head of global collateral, Swiss Re.

“The amount of additional revenue you can pick up by lending government securities for lesser-quality securities in relation to the yields on your five- or ten-year government bonds has probably never been as attractive as now. On a relative basis it will probably get less attractive than it is now.”

Demand for high-grade government bonds has been rising as top-quality collateral is required to post at central counterparties when trading OTC derivatives.

Hochreutiner was speaking at the Euroclear Collateral Conference in May.

Delegates at the conference had mixed views on whether collateral transformation trades were yet a reality. More than half (54%) said these transactions were already taking place as more lending was being driven by regulation. Some 42% said they did not see these trades occurring as it was "too early".

The definition of collateral transformation differs among market participants. Some define it as a trade being facilitated through the repo or securities lending markets in order to meet the collateral requirements of centrally-cleared derivatives while others say that collateral transformation is not a new concept as securities lending and repo have been in place for decades.

Click on the hyperlinked titles below to read more coverage from the Euroclear conference:

- Feeling the pressure in repo

- Beneficial owners fear onerous regulation

- Poll: regulation casts gloom on securities lending

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