Collateral - Core competence for the buy side

Article

Collateral is a core competence for the buy side

It was in October 2012 at the Amsterdam collateral conference that Juan Jose Fortun from BBVA Asset Management made the statement that collateral was becoming a core competence for the buy side. I remember thinking at the time what a strong statement that was and wondering how widely the view was shared among his buy side peers.

Executive summary

Today, few would disagree about the prominent role that collateral has come to occupy on the buy side. In article, we will briefly look at the reasons for this and the drivers of collateral’s rise to prominence, before considering the implications for buy side firms.

It was undoubtedly the global financial crisis of 2008 that was the trigger of the many changes we now seein the collateral world, and it is worth reflecting on why so much emphasis has been placed on collateral since then; because one thing is for sure — it was not a collateral crisis. It was both a credit crisis and a liquidity crisis, and the reason that collateral is so important is because it proved to be very effective at mitigating both credit risk and liquidity risk. Where collateral was in place, in most cases the losses were fully covered. When liquidity dried up, it was only by pledging collateral that loans could be secured. In a very real sense, it was collateral that fuelled the recovery from the crisis. So it is not surprising that both regulators and the industry have been focused on collateral ever since. It is not that collateral failed, but because it is so important it has been thoroughly examined, and any weaknesses — and there were many — are being addressed to ensure that the protection collateral affords can be as effective as possible going forward.

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Performance issue 16 - January 2015

Performance is a triannual digest, dedicated to investment management professionals, which brings you the latest articles, news and market developments from Deloitte’s professionals and clients.

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