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Opinion

Frequent issuer business faces collateral damage

At the annual Euromoney Borrowers and Investors Forum last month, the great and the good of the sovereign, supranational and agency issuer community gathered in London to meet market participants.

Many of the conversations between issuers and dealers centred on the macro picture, or likely future supply and demand dynamics following record new-issue volumes in the first half of the year.

But behind the scenes, hidden in the nuts and bolts of clearing and settling derivative trades, there were increasingly tense talks on a problem that is responsible for draining substantial levels of liquidity from banks and whose cost could amount to tens of billions.

At the heart of the problem is the fact that credit support agreements (CSAs) – protocols that are essential for the conduct of derivative deals – were established in another era: one when bank funding was so cheap that it wasn’t even deemed a cost.

It is a problem that is not only complex but also where the costs are uncertain – both in terms of scale and timing.

CSAs came about as a means of eliminating credit risk in OTC derivative transactions. Ideally, all should be symmetrical two-way CSAs, meaning that both counterparties to a swaps trade may either receive or post collateral – depending on whether it is in or out of the money.

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