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Collateral Dynamics The efficient mobilisation of collateral is important not events as well as highlighting where future challenges will

only in the context of the smooth running of traditionally come from.
collateralised markets such as securities lending and repo,
but collateral increasingly underpins many derivatives When we last looked at the data that we collect for
markets as well. In addition, the development of centrally collateral (July 2020), we observed a very different asset
cleared markets will also be a driver of demand for profile from those seen in prior years. Typically, non-
collateral as market participants pursue ever more efficient cash collateral that is held within the European tri-party
settlement frameworks. ecosystem is broadly split 45/45/10, between equities,
government bonds, and corporate bonds respectively. In
The development of a collateralised market around June however, the proportion of equities being used as
securities lending was primarily driven by a lenders desire collateral fell to the lowest we had ever seen, circa 13%.
to simply mitigate any counterparty credit risk through Looking back to that time, it is clear the underlying fall in
the provision of either cash or non-cash collateral. Today, equity values had fundamentally undermined borrowers’
that is still the basic premise that reinforces the role of ability to use equities as collateral. What was something
collateral in our markets. of a surprise however, was that instead of borrowers using
government bonds in place of equities, there was in fact a
The same collateral techniques however, provide market steep rise in the use of corporate bonds as collateral, which
participants with the opportunity to actively manage other increased to over 30% of all collateral (up from a typical
binding capital and balance sheet constraints and move level of 10%).
collateral around the system in an efficient way.
As we have arrived at the year-end, we can report that
2020 saw many facets of our markets fiercely tested, with the collateral landscape in Europe had returned to a more
trading systems and settlement engines having to deal with normal picture. As the following chart confirms, equities as
multiple volumes of normal business as market participants a proportion of all collateral held in European tri-party as at
reacted to the trading extremes seen during the year. 31 December had returned to a more recognisable level of
The collateral markets were no exception, and how they circa 44%, with government bonds and corporate bonds at
reacted provides some further context to these recent 45% and 10% respectively.

Fig 17: Securities Lending Collateral
Held in European Tri-party
Source: BNY Mellon, Clearstream,
44%
Euroclear & J. P. Morgan
45%
Equities
Corporate Bonds
10% Government Bonds
Other

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