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The information obtained from interviews and associated findings outlined in this report is the result of a point-in-time stocktaking exercise; however, many of the services described within it are still evolving. Additionally, the supply and demand dynamics of collateral are likely to shift as mandatory clearing requirements are phased in and as economic conditions change. CMSPs are taking into account changing conditions and are likely to continue to respond with new innovations and/or modifications to existing services. In that context, the providers and users of such services should actively identify, measure and manage the risks associated with collateral management services. It is important that the public and the private sector be aware of potential risk areas depending on how collateral supply and demand factors change and how supporting collateral management services evolve.
The innovation under way relies upon existing infrastructure and market transactions to improve collateral management services. Consequently, new types of risk are not being introduced. Nevertheless, this innovation is increasing dependencies across a number of systemically important financial institutions and market infrastructures across locations. In addition to the new linkages being created, a greater desire for more efficient collateral management on the part of buy-side market participants is bringing new users to these services.
As collateral demands continue to rise and collateral management services are in turn increasingly adopted, market participants may become more and more reliant on those services to fulfil their obligations. Against that background, collateral management services may reach a level of criticality that makes them a systemically important activity. In the interim, as CMSPs are developing a view into a customer’s available securities and collateral obligations, they may serve as an effective means to monitor the continuing evolution of supply and demand as well as customer reliance on the various aspects of their service provision.
The focus on improvements to optimisation for the purposes of efficient collateral allocation may move market participants closer to “just-in-time” collateral management. Both market participants and service providers will need to be prepared for less predictable collateral demands. In times of market stress and increased volatility, a broad number of customers may experience unexpected demands for collateral that may need to be fulfilled quickly. It may be important for market participants to test their ability to procure collateral and CMSPs to test their capacity to process a large number of unexpected collateral movements in stressed scenarios.
As these services begin to play a greater role in supporting a customer’s ability to fulfil its collateral obligations, particularly through use of cross-border transactions, it may be important for service providers to work collaboratively to ensure the ongoing reliability of the services given the complexity of networks being created to support such services.
The CPMI and other public sector bodies have a strong interest in monitoring and understanding the continued evolution of collateral management services and how to appropriately manage the associated risks. The CPMI will continue to monitor further developments in collateral management services and coordinate with other public sector bodies, as appropriate, in considering any follow-up work.