OIS discounting and collateral management under new regulations

Abstract

Purpose – The purpose of this paper is to discuss the compliance with the regulatory-driven changes to collateral management and OIS discounting indicating operational and technological challenges faced by global investment banks. As it transpires, collateral management strategies need to be revised to find optimal solutions for the regulatory-driven landscape. Furthermore, set against the regulatory background, this report tests the reliability of OIS discounting and current trends in interbank lending, as well as emergent issues with CSAs. Design/methodology/approach – This paper is based on an exploratory, qualitative approach to investigate the regulatory-driven collateral management landscape. Findings – The new regulatory framework was viewed by the surveyed banks as a factor influencing strategic planning and operations within collateral management. All surveyed banks pointed to the increased regulatory reporting. The interviewed banks highlighted inconsistencies in implementing the new regulatory framework across different countries. With reference to the positive factors influencing collateral management, the responses were mixed and depended on bank-specific opportunities spotted in the new collateral management landscape. According to the surveyed banks, complying with the new regulations has no pronounced impact on the liquidity. The financial scandals undermined the credibility of the LIBOR rate-setting processes and prompted changes to the regulatory framework in the banking sector. Against this backdrop, the interviewed banks considered various alternatives to LIBOR, often beyond the OIS rates. The departure from LIBOR entails operational challenges faced by the participating banks. Surprisingly, the factors that pushed the interviewed banks to OIS discounting were not linked to the regulatory change or reliability of OIS rates but general market trends that emerged in the aftermath of the global financial crisis. Originality/value – The paper contributes to the widespread, albeit complex, discussion on how banks adapt to the rapidly changing environment in collateral management and risk operations.