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FSB maps out plans to monitor non-cash collateral re-use

25 January 2017

Collateral re-use may pose financial stability risks according to the FSB

Read more: collateral re-use

Officials at the Financial Stability Board (FSB) have published more details on plans to collect data on non-cash collateral re-use activity in the securities finance market.

The international body, which makes recommendations about the global financial system, agreed on set of measurements and metrics this week used to calculate non-cash collateral re-use.

FSB members (which include the world’s leading central banks), will be expected to gather data from market participants on such activity with breakdowns by sector and type as well as re-use concentration measures.

This will be transmitted to the FSB for global aggregation from January 2020.

The term re-use applies when a market participant, such as a bank, receives securities as collateral in one transaction and sells, pledges or transfers this collateral in a second trade.

Collateral may be received by a market participant as a result of a variety of securities finance transactions, such as reverse repos, securities lending, margin lending and over-the-counter derivatives.

The use of non-cash collateral for securities lending transactions varies markedly around the globe. 

In Europe, Canada, and Australia, for instance, non-cash has always been the dominant form of collateral, while in the US loans of securities have traditionally been transacted primarily versus cash.

The FSB's plans run alongside efforts by national and regional authorities to get a clearer view of the securities finance industry, which is considered opaque by many regulators. 

European securities watchdog ESMA is leading the implementation of SFTR, which will require firms to report details of stock loan and repo transactions, including collateral re-use, to trade repositories.

In the US, the Office for Financial Research (OFR) has launched a pilot project to fill gaps in data with a focus on bilateral repo markets and securities lending markets.

Similarly, in Japan, the Bank of Japan and Financial Services Agency conducted a pilot data collection on Japanese financial institutions’ securities financing activities in 2015.

As the FSB points out, the re-use of collateral plays an important role in the functioning of financial markets by increasing the overall availability of collateral and cutting transaction and liquidity/funding costs, since a given pool of collateral assets can be re-used to support more than one trade. 

However, according to the regulator, collateral re-use may also pose financial stability risks, for example by contributing to the build-up of excessive leverage of individual entities and in the financial system as a whole.

It also increases the interconnectedness of market participants, due to chains of transactions involving the re-use of collateral, which may create a risk of contagion where fails to deliver re-used collateral by one party may potentially cause additional fails.

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