Overview on the landscape of securities financing transactions and derivatives markets, the extent of SFT markets in the EU and possible risk amplifiers.

1. Collateral intermediation
and the re-use of collateral
Achim Braunsteffer, ESRB Secretariat
Frankfurt
JEGS, 23 June 2017

2. 2
Outline
Frankfurt
JEGS, 23 June 2017
• Landscape of institutions involved
• Data and trends in the use of financial collateral
• Possible channels for risk amplification
• Possible future indicators for EU Shadow Banking Monitor

3. 3
Collateral markets and financial stability risks
Frankfurt
JEGS, 23 June 2017
• Economic function of collateral is to
1. address counterparty credit risk
2. facilitate financial intermediation
• Increasing use of collateral due to
– preference for secured transactions (i.e. repos) and
– introduction of clearing obligations and collateral requirements (i.e. interest
rate swaps)
• EU Shadow Banking Monitor 2017 highlights procyclicality, leverage and
liquidity risk created through the use of derivatives and SFTs
• Presentation focuses on collateral in both securities financing
transactions (SFTs) and derivatives markets

4. 4
Landscape of institutions in collateral markets
Frankfurt
JEGS, 23 June 2017
Adopted from Singh (2014) and Singh (2017).
Borrowers of collateral Providers of collateral
Collateral
Intermediation
(via SFTs,
derivatives, etc.)
Hedge
funds
Collateral
Money
MMFs
Central
banks
Collateral
Money
Asset
managers,
ICPFs
Banks,
broker-
dealers
Securities
lending
CCPs
Margins,
default fund

5. 5
Around 90% of repos are collateralised with fixed
income securities
Frankfurt
JEGS, 23 June 2017
• Repos are source of high-quality collateral (and financing) for banks
while securities loans are source of high-quality collateral (and revenue)
for non-banks
0
1
2
3
4
5
6
7
8
2002 2004 2006 2008 2010 2012 2014 2016
Thousands
repos
reverse repos
Size of the EU repo market
(€ trillions)
Sources: ICMA and ESMA.
Note: Gross nominal volume of European repo contracts outstanding.
Sources: Markit and ESMA.
Note: Total market value of EU securities on loan.
EU securities on loan
(€ billions)
0
200
400
600
800
1000
1200
1400
04/08 04/09 04/10 04/11 04/12 04/13 04/14 04/15 04/16
government bonds
corporate bonds
equities

6. 6
Several possible channels for risk amplifications…
Frankfurt
JEGS, 23 June 2017
(1) Procyclicality of margins and haircuts
• can lead to build-up of excessive leverage
• can trigger or exacerbate stress in the financial system
• has procyclical effects on special collateral
(2) Re-use of non-cash collateral
• facilitates build-up of leverage,
maturity and liquidity transformation
(3) Reinvestment of cash collateral
• involves liquidity and maturity transformation if invested in securities
with longer maturities
(4) Intermediation chains
• potentially opaque collateral chains across and within sectors
Collateral taker has the right to re-use
collateral in their own name
• Rehypothecation and selling or
lending to third party
• Return equivalent collateral

7. • Size of SFT markets
• Whom-to-whom matrix
• Concentration (i.e. Herfindahl index)
General
• Synthetic leverage (off-balance sheet exposure / assets)
• Evolution of margins and haircuts
• Collateral scarcity premia
Procyclicality
• Share of collateral available for re-use
• Collateral re-use factor (i.e. multiplier)
• Extent of cash collateral reinvestment
Re-use of collateral
• Open vs. term transactions; difference between loan and collateral leg
• Cash collateral received at open and invested at term maturity
• Collateral upgrade transactions
Maturity and liquidity
transformation
• Cross-border and cross-sector (i.e. network analyses)
• Geographical analysis of pledged collateralInterconnectedness
7Frankfurt
JEGS, 23 June 2017
…could be analysed on the basis of newly available
data

8. 8
Thank you!
Frankfurt
JEGS, 23 June 2017

9. 9
ANNEX
Frankfurt
JEGS, 23 June 2017

10. 10
• What are SFTs?
– Exchange of cash or securities against collateral for a price
– Used for financing, sourcing collateral, market making, yield enhancement,
avoiding settlement fails, short sales, collateral transformation, etc.
– Considered shadow banking activities because they are short-term financing,
used for liquidity/maturity transformation and create contagion channels
between banks and non-banks
Securities financing transactions (SFTs)
Main SFT types Loan leg Collateral leg
Repo Cash Securities
Securities loan Securities Cash or securities
Margin loan Cash (Re-used) securities
Frankfurt
JEGS, 23 June 2017

11. • Singh, M. (2017). Collateral Reuse and Balance Sheet Space. IMF
Working Paper No. 17/113
• Baranova, Y., Z. Liu and J. Loss (2016). The role of collateral in
supporting liquidity. Bank of England Staff Working Paper No. 609
• CGFS (2017). Repo market functioning.
• Keller, J, Bouveret, A., de Rossi, F., Mazzacurati, J., Molitor, P.,
Picillo, C., Söderberg, J. and Theal, J. (2014). Securities financing
transactions and the (re)use of collateral in Europe. ESRB
Occasional Paper No. 6
• Mazzacurati, J. (2017). Haircuts in EU securities financing
markets. ESMA TRV No. 1 2017, pp. 52-57.
11
Literature
Frankfurt
JEGS, 23 June 2017