Cross-border collateral arrangements
9 January 2006
The Committee on Payment and Settlement Systems (CPSS) is today publishing the report Cross-border collateral arrangements.
During the past few years, with the globalisation of financial markets and the increasing use of collateral to mitigate counterparty risks in financial market transactions, the banking community has discussed the potential to use collateral in one country or currency to obtain liquidity in another. Accepting foreign assets as collateral, either routinely or only in exceptional circumstances, is an option that central banks could take in order to address commercial banks' intraday liquidity needs.
This report describes existing institutional arrangements through which central banks accept collateral denominated in a foreign currency or located in a foreign jurisdiction to support intraday or overnight credit, either routinely or in an emergency. It also discusses alternative models for the acceptance of foreign collateral. In addition, the report identifies the potential implications of a central bank's collateral policy for financial stability, competition and the safety and efficiency of payment systems.
The analyses in the report are based on the experience of the G10 central banks and the outcome of a series of interviews conducted with selected internationally active banks.
The G10 central banks have agreed on an "à la carte approach", under which each central bank decides independently whether and, if so, under what circumstances, to accept cross-border collateral. Such an approach recognises the diversity and complexity of domestic financial markets, liquidity usage, and central bank operational structures. Furthermore, some form of coordination and cooperation among central banks may increase the effectiveness of an individual central bank's policies and actions, or may aid the private sector in developing more advanced tools for managing collateral and liquidity.
This report was initiated by the CPSS under the leadership of its former chairman, Tommaso Padoa-Schioppa. It was produced for the CPSS by a working group chaired by Koenraad De Geest (until December 2004) and Daniela Russo (from January 2005), both from the European Central Bank.