More securities lending info required - Fed
30 December 2011 New York
Image: Shutterstock
More data is required to monitor repo and securities lending markets to inform policy makers and researchers about firm-level and systemic risk, according to the Federal Reserve Bank of New York.
"Better data is particularly important for understanding repo and securities lending markets and monitoring developments that may be indicative of stress. Such early warning signals can be the basis for policy decisions that aim at stabilising the financial system," the US regulator wrote in a recent staff report.
Although recognising the important role of securities lending markets for allowing shorting of securities, at the same time, the Fed notes that both repo and securities lending markets are exposed to the drying up of liquidity which can create systemic risk from runs on the markets as happened during the financial crisis.
The repo market experienced such liquidity shortages in the week prior to the Bear Stearns crisis, while the securities lending portfolio in Maiden Lane II - formed to purchase RMBS from the US securities lending reinvestment portfolio of AIG subsidiaries - illustrates the risk in liquidity mismatches of securities lending.
The report concludes that six shared characteristics of repo and securities lending trades need to be collected at the firm level: principal amount, interest rate, collateral type, haircut rate, term structure and counterparty information.
"Better data is particularly important for understanding repo and securities lending markets and monitoring developments that may be indicative of stress. Such early warning signals can be the basis for policy decisions that aim at stabilising the financial system," the US regulator wrote in a recent staff report.
Although recognising the important role of securities lending markets for allowing shorting of securities, at the same time, the Fed notes that both repo and securities lending markets are exposed to the drying up of liquidity which can create systemic risk from runs on the markets as happened during the financial crisis.
The repo market experienced such liquidity shortages in the week prior to the Bear Stearns crisis, while the securities lending portfolio in Maiden Lane II - formed to purchase RMBS from the US securities lending reinvestment portfolio of AIG subsidiaries - illustrates the risk in liquidity mismatches of securities lending.
The report concludes that six shared characteristics of repo and securities lending trades need to be collected at the firm level: principal amount, interest rate, collateral type, haircut rate, term structure and counterparty information.
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