Treasury-only money-market funds are the “functional equivalent” of Treasury bills and should be treated as such for purposes of collateral management. That is what is recommended in a recently-published paper, “Collateral Scarcity: An Approach to Preventing Market Stress from Becoming Contagion.”
Written by corporate treasury consulting firm Treasury Strategies, the paper makes its case by describing several situations and scenarios “that may prevent collateral from being readily available” and, noted the accompanying release, “There is compelling evidence to conclude that collateral scarcity may arise during market stress.”
Driving the paper is the post-crisis landscape where dramatic increases in collateral requirements have accelerated growth in the demand for high-quality assets that has far outstripped the growth of supply. The paper cited a Treasury Borrowing Advisory Committee estimate that the requirement to centrally-clear derivatives alone will “increase global demand for OTC trading-related collateral to $0.8- $2.0 trillion in normal market conditions, and $1.8-$4.6 trillion in a stress scenario.”
Tony Carfang, director at Treasury Strategies, spoke with Money Fund Report® and touched on several points underscoring the need for this proposal to be taken seriously.