Collateral transformation

Posted by adairsawyer on March 27th, 2013

Collateral transformation can help managers meet today’s tough margin requirements. But just like everywhere else, there are challenges to face and a cost will exist. The good news is that the cost will be lower compared to other alternatives. Transformation is actually a service provided in order for a company to trade its collateral for bonds, or other universal value. It was actually proposed to be seen as a solution to margin requirements. There are certain aims of financila regulations, such as maintaining confidence in financial systems and making sure it is more stable.

Perhaps many would ask how collateral transformation actually works. The main idea that stands behind it is for banks, clearing members and so to provide a service to their clients to be able to exchange assets with less liquidity and non-eligible, for a cost, to liquid instruments, CCP-eligible. The market participants can therefore source the liquid collateral from others in discussion. Part of the cost associated with such a transaction, which intermediaries will earn, can be transferred to other market participants, who can receive the improved yield.

There are of course other considerations in discussion. Trades must be structured and analyzed thoroughly, as they matter in a great manner. Transformation trades must be structured, so the impact on the market is not considerable and will not impact the trading strategy of the managers. In essence, collateral transformation is the exchange process between less liquid assets with liquid assets. Concerns also exist around market intermediaries and their balance sheets. They could actually limit the trades of collateral transformation and their quantity and how many can they take on.

Financila regulations have the purpose to subject institutions to guidelines and requirements, with the goal of maintaining the financial system’s integrity. Such a method can be handled by the government, but also by organizations. Financial regulators have many objectives in mind and protecting the consumer is just one of them. The financial system should be stable and it is expected to be so, but due to the economic crisis, things have started to lose their original track. The consumers are also losing grounds and they are suffering greatly from everything and financial instability.

Financila regulations can be mastered and the impact on collateral and liquidity management can also be kept under control. There are various methods that can be implemented. They do have impact on businesses and this is why it is so important to know everything related on the subject. What is also recommended is to conduct discussions with experts in the field and identify the matters that have the greatest impact on businesses. The government is usually the one that promulgates the rules and the laws in order to protect investors and promote the idea of a stable financial system. There are certain regulatory activities that can be conducted, such as regular inspections, lowering the standards for capital and so on.

In order to find out more about financila regulations, it would be recommended to participate at a conference and be among specialists and other experts in the industry. The importance of collateral transformation is increasing, especially when it comes to trading.