5 December 2022 15 minute read
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The recent sell-off in gilts and liquidity strain experienced by many UK investors highlights why an urgent rethink of collateral cash management is needed, argues Alastair Sewell.

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Collateral cash

The sharp sell-off in gilts in late September 2022 placed a significant liquidity strain on many investors, notably pension schemes and insurers, as they sought to raise cash to meet margin calls. The episode raises important questions about the size of collateral pools and the liquidity of assets in those pools during stressed market conditions.

Quite simply, standard collateral portfolios are not fit for purpose. A standard collateral portfolio will typically comprise a relatively modest liquidity buffer in combination with a larger basket of securities, typically gilts in the case of UK pension schemes. We know liquidity buffers were insufficient to cope with variation margin requirements during the recent stress, while collateral securities fell in price at the same time as the assets they were collateralising. 

We believe there is an alternative: starting with the future cashflow needs of the scheme and working back to the optimal portfolio.

We set out why a carefully considered allocation to high credit-quality cash and cash-like mutual funds can provide investors with optimal all-weather liquidity, while providing stable returns above cash.

Download “Collateral cash: Time for a rethink” to understand:

  • The vulnerabilities in many investors’ collateral portfolios during the recent stressed UK market conditions
  • Why standard approaches to collateral portfolio construction are flawed
  • How investors can create a more resilient collateral portfolio through allocations to high credit-quality, liquid and diversified mutual funds

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