According to a study published by Moody's Investors Service, the Dodd-Frank Act in the US and the European Market Infrastructure Regulation (EMIR) in Europe – expected to come into effect before year-end – will lead to an increased demand of high rated government bonds, which receive the most favourable regulatory capital treatment and are eligible as collateral to meet initial margin calls under central clearing requirements.
Similarly, central counterparties (CCPs) often forego initial margins and sometimes waive collateralisation of current exposures for certain types of counterparties, including sovereigns and non-financial companies.
Additionally, some liquidity constraints may arise in the future as the assets provided for the initial margin to CCPs could be immobilised because they are held in segregated custodian accounts that do not permit re-use of the securities.
"This could have the effect of removing the securities from the market for a prolonged period, potentially harming overall market liquidity", Moody's said.
The rating agency nonetheless conceded that the fact that market participants have started to adapt to the new rules has enabled the market to avoid any potential shock.
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