Who are Collateral Providers?
Collateral providers are a rare breed and considered highly sophisticated and experienced investors. Known as providers or provider groups they are companies located or found near to all the major global financial centres.
They have a few things in common but they are all known to control a vast data base of assets. Such riches are only controlled by hedge funds, sovereign wealth funds, private equity funds and senior family offices.
Why is Collateral Provided?
Provider Groups provide bank guarantees or standby letters of credit, (depending upon the jurisdiction), for the collateral transfer market. There is only one reason providers get involved in collateral transfer. Profit!
As stated above provider groups control immense wealth. They enjoy a massive diverse asset base from high risk to very conservative. The more conservative or low risk assets will have a relatively low return. These assets are recognised as governments bonds or MTN’s, (medium-term notes).
In order to increase the return on these assets the providers offer them as security to their bankers. The bank under instructions from the provider will issue bank guarantees and standby letters of credit. These instruments will be used in the collateral transfer market.
On average the providers can expect to receive a circa 6% return from their collateral transfer agreements. This 6% when added to the current return on the low risk assets makes a far more acceptable reading on the balance sheet.
For an in-depth analysis on Collateral Transfer please follow this link here.