Danish and Latvian debt offices weigh two-way collateral

The Danish and Latvian debt offices say they could start posting collateral to their derivatives counterparties – a practice many sovereign entities refuse to consider, or even to discuss publicly.

If both debt management offices (DMOs) give the go-ahead, they will join a small group of European DMOs that have already signed two-way credit support annexes (CSAs) including Hungary, Ireland, Portugal and Sweden.

Ireland’s National Treasury Management Agency (NTMA) was the most recent DMO to start posting collateral – a step it announced in its annual report last June. But while dealers say the NTMA was forced to act in order to prevent being locked out of the market, the Danish DMO says it is considering the move due to the growing cost of transacting swaps with one-way CSAs. According to a government borrowing and debt report published on February 21 by Danmarks Nationalbank, which houses the DMO, the cost of trading under a one-way CSA has increased following the financial crisis and the introduction of new regulations. As a result, the DMO is currently investigating the pricing impact of switching to two-way CSAs. The analysis is expected to be completed this year.

“We are currently analysing bilateral collateralisation because we are well aware of the capital implications and liquidity obligations that our banking counterparts are currently facing with regards to one-way CSAs, and how these issues are likely to affect the cost of transacting swaps,” says Ove Sten Jensen, head of the government debt management department at Danmarks Nationalbank in Copenhagen.

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