Collateral Markets and Financial Plumbing (3rd Edition)
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The Changing Collateral Space
The Changing Collateral Space
Foreword
Introduction
Collateral in Financial Plumbing
Collateral Velocity
Leverage in the Financial System
Quantitative Easing and the IS/LM Framework
Money, Collateral and Safe Assets
“Reverse” Monetary Policy Transmission
Central Bank Balance Sheet Policies and Emerging Markets
The Collateral Custodians
The Changing Collateral Space
Collateral in the OTC Derivatives Market
CCP Resolution Remains Unresolved
The Sovereign–Bank Nexus via OTC Derivatives
Privacy Provision, Payment Latency and the Role of Collateral
Conclusion
Annex: Chapter 2
Annex: Chapter 7
Collateral does not travel in a vacuum; it needs (on- or off-) balance sheet space to flow through the financial system. This chapter provides a snapshot of the changing collateral space and how it may shape the global demand–supply for collateral. We first identify the key collateral pools (relative to the “old” collateral space that existed during pre-Lehman days). However, post-Lehman, official sector efforts via quantitative easing (QE) are significantly altering the collateral space. Moreover, regulatory demands stemming from Basel III, Dodd–Frank, EMIR, etc., new debt issuance and collateral connectivity via custodians will also affect collateral movements.
INTRODUCTION
The importance of collateral has been investigated in several strands that relate to each other in the theoretical literature. One strand is that on collateral and default, which has primarily focused on the role of margin and “haircuts” and “fire sales” (Geanakoplos 2003; Krishnamurthy, Nagel and Orlov 2010). Another strand is on securitisation, where collateral serves to support specific asset values (Shleifer and Vishny 2011). However, this chapter is not about haircuts, fire sales, or securitisation
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