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News: LSE Study: The Economics of Collateral

23 June 2014 | Bill Hodgson

The London School of Economics has written a study on the impacts of regulation on the collateral supply and dynamics. There are two parts to the study, firstly a review and analysis of existing literature to formulate answers to the fears of a collateral shortage, and secondly a modelling exercise looking for the effects of collateral flow between the buy-side, sell-side and the CCPs. The study was supported by DTCC and they describe it thus:

With the onset of the financial crisis in 2007-2008 market participants sought safety by demanding more and better collateral to support their transactions. This change in behaviour has been reinforced by changes in regulation (e.g. Basel 3) and by structural initiatives to increase the use of centralized trading platforms and CCPs. This has given rise to an interest in the prospect of a scarcity of collateral that might inhibit economic growth. There have been various attempts to estimate the extent of this scarcity, but little agreement on the numbers.

The paper can be found over at the DTCC website here, with the paper and a summary attached below.