JPM calms collateral fears

(This story originally appeared on IFRe.com, a Thomson Reuterspublication)

By Helen Bartholomew

LONDON, Oct 8 (IFR) - Concerns of a collateral shortfall mayhave been overplayed as the universe of AAA/AA bonds growing byaround USD1trn per year according to analysts at JP Morgan.

The latest study from the US dealer may help to alleviatefears of the collateral impact stemming from new rules that willpush over-the-counter derivatives through central clearing fromJanuary 2013.

At the same time, warnings of the decline in top ratedassets have come thick and fast. The IMF predicts that USD9trnof AAA/AA assets will disappear from the market by 2016 asfurther sovereign issuers suffer downgrades.

According to the Barclays Multiverse Index, the universe ofAAA/AA bonds has grown by USD9trn since the end of 2008. JPMorgan analyst Nikolaos Panigirtzoglou believes that growth willcontinue at a steady pace "due to elevated and persistentgovernment deficits among major developed countries."

The JPM analysis follows recent comments from Benoit Coeure,executive board member of the European Central Bank, who arguesthat there is no shortage of collateral and that the ECB isaddressing the problem of scarcity.

Such interventions include support of covered bond issuance,lowering the ratings barrier for ABS issuance, implementation ofcross-border tri-party collateral management services, and thecentral bank temporarily accepting foreign currency assets.

Panigirtzoglou notes that while the share of AAA bonds hasfallen since the downgrades of France and the US, ratingrequirements have also declined.

"Tri-party repo agreements with strict AAA requirements havebeen relaxed to also include AA collateral," he said in areport. "We find very few bond funds with specific AAA mandates.Similarly, pension funds and insurance companies have no ratingrestrictions in their mandates."

The comments may help to alleviate fears of a forthcomingcollateral crunch as the USD648trn universe of over-the-counterderivatives gets swept up by the central clearing mandate thatis set to become effective as of January 2013.

On its calculations, JPM analysts believe the additionaldemand for collateral will be limited as the majority of the OTCderivatives markets already use collateral agreements.

According to a margin survey from the International Swapsand Derivatives Association conducted earlier this year, 84% ofall transactions are now executed with a collateral agreement,compared to 80% in 2011.

Collateral in the uncleared derivatives market jumped 24%through 2011 to USD1.8trn, which JPM analysts translate toUSD700bn of "real collateral" posted assuming a 2.5 timesre-hypothecation rate.

Recent estimates of the additional requirement stemming fromnew regulations for OTC derivatives vary wildly. A recent paperfrom the Bank of England put the figure at USD200bn-USD800bn,depending on netting benefits, rising to as much as USD1.7trnunder a stressed scenario.

"Even if we take these initial margin calculations intoaccount and assume total additional collateral needs of USD1trn,this is not large compared to the collateral supply metrics,"notes Panigirtzoglou, referencing the BoE report.

The IMF last year calculated a figure of USD100bn-USD200bn,while estimates from Tabb Group caused alarm by predicting thatthe requirement relating to OTC derivatives could be as much asUSD2.6bn.

(Reporting by Helen Bartholomew)

((helene.durand@thomsonreuters.com; +44 207 542 3469; ReutersMessaging: helene.durand.reuters.com@reuters.net))