Finding the right collateral

A new study by BNY Mellon and the Official Monetary and Financial Institutions Forum (OMFIF) shows that sovereign wealth funds and central banks are emerging as large-scale providers of collateral, providing a much-needed boost in liquidity to the global financial system.

Crossing the Collateral Rubicon: A new territory of challenge and opportunity for sovereign institutions notes the liquidity boost comes at a welcome time when financial institutions face challenges from new regulations on risk mitigation and balance sheet management.

“Collateral is becoming the sole determinant of institutions’ ability to engage in financial transactions in the cash or derivatives markets,” said Hani Kablawi, chief executive officer of BNY Mellon’s Asset Servicing business in EMEA. “Since the financial crisis, new regulations have placed a premium on counterparties gaining access to high quality collateral. Yet, central bank macroeconomic policies have reduced the supply of collateral. This has produced a great challenge for markets and a large-scale opportunity for official holders of these securities such as sovereign wealth funds.”