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“Grexit”, negative rates and collateral management’s “new paradigm”

Even though the potential for a Greek exit (or Grexit) from the Eurozone may be averted, again, it continues to rattle collateral managers and treasurers, further unsettling them after a long period of market volatility. While very few hold Greek assets, there’s widespread concern about the impact an exit would have on the euro and other Eurozone countries.

Fear of contagion risk looms large. The buy side has already begun to move away from accepting and holding cash deposits and money market funds originating from “peripheral” Eurozone countries, such as Spain, Portugal and Italy, according to Collateral Management in Europe: Searching for Central Intelligence, a white paper prepared for Euroclear by Aite Research. But the paper shows a Grexit might spur a wider-scale flight to safety.

This would further decrease the available collateral pool and distortion of Europe’s credit markets, caused by Europe’s negative interest rate environment. Already the ECB’s ongoing QE programme is causing bank treasurers to talk of a “new paradigm”, as they seek to fund their activities in an extraordinary monetary environment.

Such is the extent of market volatility that bank treasurers are clearly still digesting its implications. During May’s Euroclear Collateral conference, an audience poll showed that opinion had yet to settle, although ECB rates had been negative for more than six months. While 23% said the negative interest rate environment would have no impact on their business, and 40% regarded it as an annoyance they could live with, the remaining 37% stated its impact was huge.

As yet, however, the change in market conditions has not been sufficiently great to drive a widespread change in behaviour. The bank treasurers at our conference concurred that, so far, the ECB’s -20 bps deposit rate would not cause them to make fundamental changes.

But a Grexit could cause greater challenges. Collateral managers within more than half of “sell-side” firms polled for our Collateral Management in Europe paper were actively evaluating the impact of events such as the potential Grexit on the price of collateral assets when interviewed in early 2015, since when events have moved on.

Continued volatility in Europe means more firms will be forced to add scenario modelling capabilities. Understanding how macroeconomic events could impact collateral holdings is important for effectively managing capital, collateral and liquidity, especially in light of CRD IV.

Looking forward, the new paradigm in credit markets will clearly bring further challenges for collateral managers and treasurers alike.

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