Collateral asset terms

BIS Quarterly Review  |  September 2013  | 
15 September 2013

(Extract from page 70 of BIS Quarterly Review, September 2013)

What determines whether an asset is considered to be a collateral asset and how is its quality established? Although, in principle, any asset can be employed to collateralise a claim, market participants, regulators and academics typically take different views of collateral assets.1 This article considers three - clearly overlapping - definitions:

High-quality liquid assets (HQLA): This relatively narrow definition is based on regulatory considerations. HQLA include only those assets that qualify in meeting the LCR requirement. Key characteristics of these assets are their low credit and market risk. They are also expected to be easy to value, exchange-listed, traded in active markets, unencumbered, liquid during times of stress and, ideally, central bank-eligible.

High-quality assets (HQA): This term includes all assets that market participants can use to meet collateral requirements in derivative transactions. Notwithstanding regulatory guidance on eligibility criteria (eg BCBS-IOSCO (2013) for non-centrally cleared derivatives), the boundaries of the HQA set are largely determined by market practice and may, for example, be subject to cyclical developments or competitive pressures to broaden eligibility criteria among CCPs. This is the relevant definition for assessing the impact of OTC derivatives reforms.

Collateral assets: The broadest definition refers to all assets on which market participants rely in collateralised funding transactions. This definition extends well beyond HQLA and HQA, including assets such as mortgages or other credit claims that are pooled to collateralise covered bonds, agency and private-label mortgage-backed and asset-backed securities.

1 See CGFS (2013)