Derivatives houses, including ABN AMRO and Barclays Capital, and end users are starting to insist on putting collateral behind derivatives transactions in a move that could make derivatives more expensive for smaller institutions and end users. It will penalize the small institutions because they often do not have collateral management systems that allow them to invest collateral that banks post with them.
Dealers said the shift toward increasing the number of Collateral Support Annexes is linked to general concerns about deteriorating credit quality, but could also be caused by firms positioning for the new Basle capital adequacy accord and the European Collateral Directive.
"There is a renewed energy to sign agreements with those counterparties we don't have them with," said Robert McWilliam, head of global collateral management at ABN AMRO in London and chairman of ISDA's collateral committee. The firm currently has collateral agreements for around 50% of derivatives transactions and wants to increase that to as near 100% as possible. Likewise, James Crab, head of collateral management at Barclays Capital in London, said the firm, in line with the rest of the market, is trying to boost its collateral agreements. It currently has CSAs for around 50% of its derivatives transactions.
ABN AMRO and Barclays are both pushing to have rating-independent zero threshold agreements in place, meaning that even a AAA counterparty would have to post collateral if the value of a contract fell. In addition, the firms are putting daily margin calls into agreements, McWilliam said. Previously they allowed some counterparties to negotiate weekly or monthly calls.
For end users, collateral support annexes are increasing in importance as well. European Investment Bank recently outsourced its collateral management to ABN AMRO. Anneli Peshkoff, director in EIB's treasury department, said one of the drivers for this move was a shift to daily margin calls. "We need to be extremely diligent about our collateral agreements and it is still an evolving area," she said.
