Collateral optimisation, re-use and transformation

High-quality collateral is in greater demand than before the financial crisis, due to more prudent counterparty risk management as well as new regulations governing OTC derivatives and liquidity. Against this background financial institutions are currently reassessing their collateral management. Many institutions are or are considering investing in collateral information systems, optimising their collateral allocation or transforming their collateral to acquire the desired collateral assets. This study describes how the Dutch financial sector reacts to increasing collateral needs based on interviews with a select sample of banks, (pension fund) asset managers and insurance companies in the Netherlands. Collateral optimisation, re-use and transformation enable institutions to adapt to a world where collateral is in greater demand but there are also significant risks, such as new liquidity risks, greater interdependence and procyclicality. The study examines these potential risks and discusses implications for future policy.