Loans secured with collaterals have been in the existence for at least a few hundred years, if not more. There have been mention of land pledged for loans during the Roman Empire or Ancient Greece. As have the financial markets evolved so have been the usage
of collaterals.
There are many collaterals (such as land, machinery, etc.) which by their intrinsic property can be efficiently used, even while securing a loan. But over the years, there are other standardized collaterals (such as Sovereign Bonds, Investment Grade Securities,
Corporate Bonds, etc.) which are also being used to secure loans. These Collaterals evolved from the Financial Markets and can be efficiently used only when taken back to the Financial Markets.
A single market place for Collaterals where different participants trade standardized collaterals can go a long way to increase liquidity in the markets and reduce the risk for the participants. This market place can also help participants deal with increasing
regulatory pressure by matching buyer seller for the required securities.
- Banks – Central Bank Market Place
Central Banks through their open market operations not only buy / sell securities but also temporarily lend money to financial institutions. Like any lender, they mitigate the risk by asking for collaterals. The collaterals required can vary from one Central
Bank to another, such as allowing only Sovereign bonds or also allowing Investment Grade Securities or Corporate Bonds. But the essence is same that there are multiple borrowers (banks) and a lender (central bank). One of the borrowers may have an excess of
particular collateral which could be required by another borrower. Thus a trading platform can lead to better utilization of resources for all the participants.
- Broker-Dealer Market Place
Broker-Dealer could be any financial institution, individual or subsidiary of banks. The primary activity for Broker-Dealer is trading in securities. But also, the Broker-Dealer could make margin loans to customers. Margin Loans help customer purchase standardized
securities which then become a collateral for the loan. There could be another customer looking to take a short position for the same security. Thus the Broker-Dealer can match both the customers, in return, charging a trade fees and also leading to lower
cost of funds.
- Peer to peer Lending
Most of the countries are still lacking regulations for peer to peer lending. But there are established financial institutions which are showing interest in providing platforms for peer to peer lending, with some controls. The faith of the customer increases
when there is a financial institution involved as an intermediary. Here also a Collateral marketplace can provide an opportunity for Customers to trade collaterals which leads to reduced risk and in turn reduced interest being charged on secured loans.
Bringing these diverse participants on common marketplace could definitely increase the liquidity of different markets. Also it may also lead to simplification and standardization of operation aspects of collaterals management.
There are definitely going to be some challenges when trying to create common marketplace. The common marketplace would need a parallel operational control. Each of the Collateral trades would need to be properly tracked but also would require optional anonymity
for the participants. Also these trades would need to be legally binding on the participants. The regulatory aspects vary from geography to geography and would need a strong initiative from the government or major market participants.
The future of IT solutions is moving towards interoperability. Collateral Marketplace could be a strong platform for the Banking Solution vendors to take up this change forward by initiating conversations with their partners.