Non-cash Collateral Re-Use: Measure and Metrics
This report finalises the measure and metrics of non-cash collateral re-use in securities financing transactions that authorities will monitor for financial stability purposes.
The re-use of collateral plays an important role in the functioning of financial markets. It increases the availability of collateral, reduces the cost of using it, and consequently reduces transaction and liquidity costs. At the same time, however, as highlighted during the 2007-09 global financial crisis, collateral re-use may pose potential risks to the financial system. For example, collateral re-use may contribute to a build-up of excessive leverage of individual entities and in the financial system as a whole. It may also increase interconnectedness among market participants, through 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.
The FSB published a public consultation on possible measures for assessing collateral re-use in February 2016. In light of the responses received, the FSB has now finalised the measure and metrics of non-cash collateral re-use as well as the related data elements to monitor collateral re-use which is restricted to collateral received and subsequently re-used in securities financing transactions.
FSB members have agreed to transmit the national aggregated data to the FSB for global aggregation so as to assess global trends in non-cash collateral re-use. An aggregate measure of collateral re-use, available at both a national and global level, will provide insights into the contribution of interconnectedness in the collateral markets and the build-up of leverage. The FSB also highlights the need to review the scope, measure and metrics of collateral re-use as market practices evolve. This is planned to be undertaken five years after the launch of the global data collection with regard to non-cash collateral re-use, with a continued discussion with market participants as appropriate.
This report is part of the FSB’s work to transform shadow banking into resilient market-based finance, in particular its work to improve reporting and transparency of securities financing markets. The FSB has developed, in cooperation with market participants, standards and processes for global securities financing data collection and aggregation that are relevant for financial stability monitoring and policy responses. Such standards and processes will allow the FSB to collect from national/regional authorities aggregated data on repos, securities lending and margin lending, based on consistent definitions and minimal double counting at the global level. The finalised standards were published in November 2015 and the FSB has started work on the detailed operational arrangements to initiate the official data collection and aggregation at the end of 2018. Data related to collateral re-use will be transmitted to the FSB for global aggregation from January 2020.