Transcript of Question & Answer Session Collateral and Liquidity: Striking the Right Balance


Hi Mark, I’d be interested in your views in regards to eligibility of equities. Basel III High-quality Liquid Assets has included equities with appropriate haircuts. APRA seems to have taken a considerably conservative view of including that within Australia. You mentioned the benefits of commercially having certain securities as part of your eligible schedule. You also mentioned things like your mortgage-backed securities or asset-backed securities as part of that schedule, in regards to the liquidity arrangements. Just given the history of equities performing through the GFC and the liquidity arrangements there, just interested to understand what work the RBA has done, in regards to taking equities within their schedule, and if not why not? Is it liquidity based? Is it structural? Is it infrastructure and where might that lead in the future?

Mark Manning

Well I think at this point, equities haven’t been considered as part of the Reserve Bank’s collateral eligibility criteria. We’re certainly aware that equities are used as collateral in some segments of the market, equities are used as specific collateral in ASX Clear where they are supporting exchange traded option positions. And high quality, most liquid equities are also envisaged as potentially being eligible under the new Basel Committee and IOSCO standards for initial margining of non-centrally cleared derivatives. So there is a bit of of a focus there and there is some consideration being given to the extent to which these could be appropriate collateral securities, as you say with appropriate haircuts. So I think work in this area is just going to continue to evolve and will reflect in many senses, the extent to which some of these collateral strains that I’ve just been referring to materialise over time.

Ross Davies (BNP Paribas)

Hi Mark, Ross Davies from BNP Paribas. Just in terms of counter-party concentration risk, how concerned is RBA on counter party risk? You talked about the significant amount of IRS that is cleared through LCH for instance, and in addition the amount of Australian collateral that is now being held off shore.

Mark Manning

So, concentration risk has of course been a bit of a theme in a lot of policy commentary and research that has been coming through since the big policy drive towards central counter-party clearing. It’s recognised that central counter-parties in many cases mitigate interconnectedness in financial markets by breaking down this very, very complex network of bilateral connections between financial institutions, but replaces that with a systemically important hub in the centre. But the important thing there then is that the basket in which you’ve put all your eggs is monitored very, very closely. And that requires rigorous oversight and regulation against highly- exacting standards and also requires that the regulatory community puts in place effective mechanisms for recovery and resolution of central counter-parties and other critical pieces of the financial market infrastructure, should the very worst happen. And that would ensure that there would remain continuity of service in financial markets from what are clearly systemically important pieces of infrastructure. And so, in that regard, in order to provide these sorts of services in the Australian financial system, whether it’s an offshore or a domestic piece of infrastructure, there is a licensing process. The infrastructure needs to be licensed by the Minister, regulated by ASIC and the Reserve Bank, and we have in place financial stability standards that are aligned with the international standards in this area, the CPSR scope, principals for financial market infrastructure. We’re also working very hard with our colleagues in the other agencies of the Council of Financial Regulators to establish a special resolution regime for financial market infrastructure and that will underpin the regulatory framework and as I say, ensure that the critical services provided by these infrastructures, which as you rightly say naturally concentrate exposures, are provided to the markets continuously and safely and robustly.