JPM calms collateral fears

(This story originally appeared on, a Thomson Reuters publication)

By Helen Bartholomew

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

The latest study from the US dealer may help to alleviate fears of the collateral impact stemming from new rules that will push over-the-counter derivatives through central clearing from January 2013.

At the same time, warnings of the decline in top rated assets have come thick and fast. The IMF predicts that USD9trn of AAA/AA assets will disappear from the market by 2016 as further sovereign issuers suffer downgrades.

According to the Barclays Multiverse Index, the universe of AAA/AA bonds has grown by USD9trn since the end of 2008. JP Morgan analyst Nikolaos Panigirtzoglou believes that growth will continue at a steady pace "due to elevated and persistent government deficits among major developed countries."

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

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

Panigirtzoglou notes that while the share of AAA bonds has fallen since the downgrades of France and the US, rating requirements have also declined.

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

The comments may help to alleviate fears of a forthcoming collateral crunch as the USD648trn universe of over-the-counter derivatives gets swept up by the central clearing mandate that is set to become effective as of January 2013.

On its calculations, JPM analysts believe the additional demand for collateral will be limited as the majority of the OTC derivatives markets already use collateral agreements.

According to a margin survey from the International Swaps and Derivatives Association conducted earlier this year, 84% of all 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 to USD700bn of "real collateral" posted assuming a 2.5 times re-hypothecation rate.

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

"Even if we take these initial margin calculations into account 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 that the requirement relating to OTC derivatives could be as much as USD2.6bn.

(Reporting by Helen Bartholomew)

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