The Financial Stability Board (FSB) has published its report Possible Measures of Non-Cash Collateral Re-Use.
Non-cash collateral is “re-used” when a market participant, such as a bank, receives securities as collateral in one transaction and subsequently sells, pledges or transfers this collateral in a second transaction. Collateral may be received by a market participant as a result of a variety of transactions, such as reverse repos and securities lending. If this collateral is eligible for re-use, the collateral taker can use it as collateral for other transactions. Collateral received may also be sold, creating a short position.
Collateral re-use plays an important role in the functioning of financial markets: it increases the availability of collateral, and consequently reduces transaction and liquidity/funding costs for many market participants, since a given pool of collateral assets can be re-used to support more than one transaction. At the same time, however, it may also present risks to the financial system, for instance by potentially increasing interconnectedness between market participants, and contributing to a build-up of excessive leverage of individual entities and in the financial system as a whole. It is therefore important for authorities to improve their understanding of collateral re-use practices and the potential impact of collateral re-use on financial stability.
This report describes possible measures of non-cash collateral re-use, and the related data elements, that could potentially be included in the FSB’s global securities financing data standards. Authorities would be asked to report national/regional aggregates of these measures to the FSB. The report is intended to provide a starting point for discussions with market participants and researchers concerning the derivation of a meaningful measure(s) of collateral re-use to be used to evaluate global trends and to assess risks to financial stability.
The FSB says it welcomes comments on the report including the scope, possible measures of non-cash collateral re-use and the data elements set out in this document. Comments and responses to questions should be submitted by April 22.
All comments will be published on the FSB website unless a commenter specifically requests confidential treatment.