Changes in the way collateral is used, particularly in regard to implications for liquidity of financial institutions, are attracting the attention of the world central banks and policymakers.  In a speech to the Global Investors and ISF Australia Conference in Sydney yesterday, Mark Manning, Deputy Head of Payments Policy for the financial system at the Reserve Bank of Australia, listed some of the factors as: •    expansion of central counterparty clearing; •    margining of non-centrally cleared derivatives; •    higher capital charges for uncollateralised exposures; •    an emerging investor preference for collateralised lending; margin segregation; •    increasing caution around rehypothecation and •    re-use of collateral.Agreements to date have typically provided only for the exchange of collateral to cover current mark-to-market exposures; that is, variation margin, he observed."Looking ahead, however, OTC derivative trades, whether or not centrally cleared, will also be subject to collateral to cover potential future exposures should a counterparty default and the positions have to be closed out; that is, initial margin," Manning said. "Second, reforms that encourage or mandate CCP clearing of standardised over-the-counter derivative trades that require collateralisation of non-centrally cleared trades will significantly increase the demand for collateral."Manning noted that up till now most analysis had focused on outstanding securities issued, rather than on the 'effective' supply: that is, the outstanding supply of securities on issue, adjusted to reflect how much is actually available to meet collateral needs. "This requires an adjustment for how much is locked away in long-term portfolios and not made available for loan, and a further adjustment for the 'velocity' of collateral," Manning said, explaining that "collateral velocity" refers to how many different purposes are satisfied, on average, by re-using a single line of collateral.Meanwhile, the Treasury has released a 'Proposal Paper' seeking further views on how it should set up a central clearing house for Australian dollars against major trading currencies.This follows a report on the Australian OTC derivatives market, published in April 2014 by the Australian Prudential Regulatory Authority, the Australian Securities and Investments Commission and the Reserve Bank of Australia.In the report the three regulators recommended the introduction of a central clearing mandate for interest rate derivatives denominated in Australian dollars, limited to internationally active dealers.Given the recommendation by the regulators, the Government is seeking suggestions on how to set up and centrally clear interest rate derivatives denominated in four global currencies and in Australian dollars.