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Back Matter

Back Matter

Author(s):
Manmohan Singh
Published Date:
October 2016
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    Glossary of Selected Terms

    Central counterparty/clearinghouse: Central counterparties (CCPs), or clearinghouses, provide for central clearing of futures or derivatives trades and mutualisation of risk among clearing members. Regulatory initiatives that mandate that all standard over-the-counter (OTC) derivatives will have to clear will make CCPs the new too-big-to-fail organisations and focal points in financial plumbing.

    Central securities depositories: In Europe, each country’s securities must be moved from the national CSD into an account at an ICSD (international central security depository, q.v.) for cross-border use. The fragmented nature of the securities settlement landscape in Europe has historically made such movements relatively costly and time-consuming.

    Collateral velocity (or reuse rate): This is not an exact metric but gives an idea of the length of the collateral chains that stem from the reuse of financial collateral. The reuse rate of collateral – analogous to the concept of the “velocity of money” – captures the liquidity impact of collateral in the overall financial plumbing. Prerequisites for a high reuse rate include relative attractive returns and trusted counterparties. Unattractive returns or less-than-stellar counterparties lead to stranded liquidity pools, incomplete markets and shorter collateral chains.

    Default fund: In the context of CCPs, a default fund is an integral part of the “waterfall” (ie, mutualisation of large losses) that may vary among CCPs. Any residual losses that remain after using the variation and initial margin is recouped by another buffer called the default fund. This could arise from large changes in the positions due to default by one or more counterparties.

    Excess reserves: In the aftermath of quantitative easing (q.v.), some central banks have significant deposits from banks that far exceed the “reserve requirement” stipulated by the central bank. These excess deposits of the banks over the required reserves are called excess reserves.

    Initial margin and variation margin: At the inception of a derivative contract (when neither party is “in” or “out” of the money), initial margin (IM) is collected against potential future exposure that may result from a default of a counterparty. Typically, in a bilateral over-the-counter (OTC) derivative transaction, a hedge fund would pay IM to a bank; in a cleared transaction, the hedge fund would pay IM to clearing bank, which will then pass it on to a CCP. Variation margin settles current exposure (ie, daily mark-to-market positions).

    International central security depository: In Europe, ICSDs include, Euroclear and Clearstream. Euroclear and Clearstream do most of the triparty repos (q.v.) against relatively liquid fixed-income collateral. BoNYM and JPMC primarily facilitate triparty repos backed by equity collateral and less liquid fixed-income assets.

    Interoperability: Linking of CCPs, in its most practical version, would make a derivative user indifferent to the choice of a CCP, since all CCPs will be connected operationally for margin netting, default risk, etc. In theory, interoperability of CCPs would mimic one global CCP. If multiple CCPs do not interoperate (due to cross-border legal and bankruptcy issues), the benefits of netting are significantly reduced. At present across-product netting does not take place since most CCPs offer netting only in the same asset class and not across products; and they do not want to lose their niche market(s).

    IS/LM model with collateral: The IS curve stands for investment and saving; the LM curve stands for liquidity preference and money supply. However, textbooks that use the IS/LM framework do not incorporate financial (pledged) collateral in either IS or LM curves, which this book does (see Chapter 4).

    Netting: Typically, when a bank summarises its overall derivative positions, it can do so across all products – credit default swaps, interest-rate swaps, foreign exchange and so on. So if a bank’s overall portfolio is such that there is a positive or in-the-money position from a CDS contract (eg, with a reference entity such as the Republic of Italy), and a negative or out-of-money position from an IRS contract (with the same reference entity), then the two contracts “net” on the bank’s derivative book.

    New collateral space: Since Lehman’s crisis, several simultaneous changes on the collateral front stemming from quantitative easing (QE), proposed regulations, the role of custodians, the US Fed’s reverse repo programme and so forth have redrawn the old collateral space that largely spanned the bank–non-bank collateral flows (see Triparty repo, below).

    Qualified financial contracts: QFCs take the form of derivatives and repos. Under prevailing legal rules, such as the “safe harbour” provision, QFCs are allowed to be exempt from “automatic stay” during bankruptcy. In other words, QFCs are prioritised in reorganisation because they are deemed to be too interconnected with financial markets and thus too disruptive to tinker with.

    Quantitative easing: Central banks have taken good collateral (eg, the Fed and Bank of England) and also the not so good collateral (eg, the ECB) out of the market for macroeconomic reasons under the rubric of QE. This has resulted in large balance sheets of central banks.

    Recovery/resolution of a CCP: Recovery is associated with tools available to the CCP (and its members and end-users) to survive as a going concern. Resolution entails statutory tools outside and beyond the control of the CCP. Resolution may result in the unwinding of a CCP.

    Rehypothecation: The use of financial collateral by a collateral taker as security for their own obligations to some third party (ie, onward pledging).

    Reuse rate: See Collateral velocity, above.

    Securities lending: Securities lending (typically pension funds, sovereign wealth funds, insurance companies and some asset managers) provides collateral to augment the overall returns from their securities, just like repo. Securities lending transactions generally have no set end date (unlike a repo) and the securities can be recalled any time. With respect to legal rights, securities lending is effectively identical to repo and both include title transfer (q.v.).

    Securities lending agent: Custodians such as Euroclear, Clearstream and the Bank of New York typically act as securities lending agents on behalf of their custody clients. Non-custody banks and asset managers can also act as securities lending agents.

    Shadow banking: The non-bank–bank nexus embodies the rapid growth in financial intermediation whereby non-banks interact with banks. The “puts” or potential taxpayer liabilities that occur for non-economic reasons have given a negative connotation to these activities, and, unfortunately, shadow banking is used in a pejorative sense.

    Sovereign–bank nexus via derivatives: New regulations require all users of OTC derivatives to post collateral to CCPs when using clearable derivatives. However, the regulations exempt sovereigns, supranational (such as the ECB, World Bank) and agencies (Fannie Mae etc) from posting collateral; these are grouped as SSAs. This keeps the sovereign–bank umbilical cord intact.

    TARGET2-Securities: T2S is one of the largest infrastructure projects launched by the Eurosystem, and aims to standardise cross-border settlement for the pan-European market, and improve the post-trading infrastructure in Europe by providing a single platform for securities settlement in a central bank.

    Title transfer: Commonly used in financial collateral arrangements (such as repo, securities lending and OTC derivatives), title transfer changes ownership of the property. Most financial contracts include title transfer.

    Triparty repo: Triparty repo agents act as an intermediary in managing the flow of cash and collateral between two parties to a repo transaction. For example, in the US, the triparty repo market is intermediated by two agents: the Bank of New York and JPMorgan.

    Variation margin: See Initial margin, above.

    Variation margin gains haircut: Central-bank backstop is usually an argument for providing liquidity support for a systemic important entity (such as a CCP). However, it is not clear, ex ante, if indeed the backstop is for liquidity or solvency of the entity. In this context, a VMGH is a proposed tool that may get around the ambiguity that straddles liquidity and solvency issues.

    Index

    A

    • AIFMD (Alternative Investment Fund Managers Directive) 136

    • AIG (American International Group) 96

    • Alternative Investment Fund Managers Directive (AIFMD) 136

    • American International Group (AIG) 96

    • Australia, and CCPs 109–10

    B

    • Bank of America/Merrill 16

    • Bank of England 32, 65, 104, 125

      • and QE 122

      • as repository of good collateral 60

    • Bank of Japan 65, 85, 122

      • as repository of good collateral 60

    • Bank of New York Mellon 9, 21, 47, 63, 118, 123, 133, 139, 141, 175

    • Barclays 16, 99, 175

    • Basel III 62, 95, 117, 119, 122, 131, 146, 149, 157, 161

    • BCBS–IOSCO 156, 159

    • BNP Paribas 16

    • Bundesbank 131

    C

    • Canada, and CCPs 109–10

    • Cantor Fitzgerald 175

    • central banks and collateral markets 60–4

    • central counterparties (CCPs):

      • alternative route: taxing derivative liabilities 106–8

        • analytics of 108–9

      • and Australia 110

      • and breakdown of financial plumbing 155–68, 156, 162, 163

        • and CCPs past and future 157–9

        • introduced and discussed 155–7

        • and loss-allocation choices 159–61

        • and variation margin gains haircut 161–6, 163

      • and Canada 109–10

      • and liquid resources, sufficiency of 165

      • OTC derivatives move to 46, 97–106

        • and central-bank backstop 102–4

        • and decrease in velocity rate 105

        • and inoperability 101, 103

        • and sizable collateral requirements 101–2

        • and utilities 105

      • past and future 157–9

      • resolution and recovery 104–5

      • and utilities 105

    • changing space of collateral 117–27, 121, 126 (see also collateral)

      • and central banks 120–2, 121

      • and custodians 121, 122–4

      • and custody versus rehypothecation 126–7, 126

      • introduced and discussed 117–18

      • near-term factors driving 120–4

      • and new (net) debt issuance 121, 124

      • and new regulations 121, 122

      • old and new 118–20, 119, 121

      • and policy issues 124–5

    • Citibank 16, 49, 141

    • Clearstream 47, 122, 123, 133, 134, 136, 138, 139, 141

    • collateral:

      • changing space of 117–27, 121, 126

        • and central banks 120–2, 121

        • and custodians 121, 122–4

        • and custody versus rehypothecation 126–7, 126

        • introduced and discussed 117–18

        • near-term factors driving 120–4

        • and new (net) debt issuance 121, 124

        • and new regulations 121, 122

        • old and new 118–20, 119, 121

        • and policy issues 124–5

      • and custodians in global financial system 139

      • with custodians, and what is on loan 135–6 (see also custodians)

      • custody versus rehypothecation 126–7, 126

      • dealer-to-dealer 7–9 (see also collateral)

      • in financial plumbing 1–14, 6, 7, 40, 61

        • and choice of balance sheets 12–13

        • dealer-to-dealer 7–9

        • jamming 65–6

        • and money and pledged collateral 1–3

        • and QE 65–6

        • and regulation, post-Lehman 3–11

        • and rules on rehypothecation 10–11 (see also rehypothecation)

        • and securitisation vehicles 10

        • and triparty repo collateral market and rehypothecation 9–10

      • infrastructures of 129–43, 130, 137

        • and custodians 132–4

        • and custodians, and what is on offer 129–43

        • introduced and discussed 129–32, 130

        • and securities lending 141–3 (see also securities lending)

        • and TARGET2-Securities 134–41, 137

      • and monetary policy 53–70, 54, 57, 58, 59, 60, 61

        • and central banks and collateral markets 60–4

        • introduced and discussed 53–5

        • and price of money and price of collateral 55–6

        • via IS/LM framework 56–60

      • and money and safe assets 73–93, 76, 77, 81, 82, 85, 87, 91

        • (adjusted) money multiplier 74–7

        • collateral 77–83

        • introduced and discussed 73–7

        • monetary policy and financial lubrication 83–6, 85

        • and treasury bills 86–9

      • pledged 6, 7, 25, 177

        • and augmenting rate of return 25

        • global banks’ reuse of 176, 177

        • and money 1–3

        • and money aggregates 84–6

        • reuse of, by global banks 176, 177

        • size of market for 4–7

        • in US and non-US jurisdictions, accounting for 8

      • price of, and price of money 55–6

      • reuse of, see velocity

      • sources of 15–23, 23

        • bank–dealer 22–3

        • as of end-2015 24–6

        • equity strategies 16–18

        • hedge funds 16, 17, 18

        • not involving borrowing/leverage 20–1

        • repo strategies 18–20, 19

        • securities lending 21–2, 22

      • use and reuse of 39–41

      • velocity (reuse) of, see velocity and weakening chains 31–2

    • collateral highways xii

    • collateral hubs xii

    • collateral transformation xii

    • Committee for Payments and Settlement Systems (CPSS) 103

    • CPSS (Committee for Payments and Settlement Systems) 103

    • CPSS–IOSCO xi, 160

    • Credit Suisse 16, 175

    • custodians 21, 24, 63, 87, 117, 118, 119, 121, 122–4, 126

      • collateral with, and what is on loan 135–6

      • global 133–4

      • in global financial system 139–40

      • and global market infrastructure 132–4

    • custody versus rehypothecation 126–7, 126 (see also collateral)

    D

    • Data Explorers 21

    • dealer-to-dealer collateral 7–9 (see also collateral)

    • deleveraging 26–30, 26

      • of components – balance sheet and interconnectedness 30–4

      • and difficulty of velocity calculation under new regulations 30

    • Depository Trust and Clearing Corporation (DTCC) 63, 133, 175

    • Deutsche Bank 16, 49, 175

    • Dodd–Frank Act 117, 119, 122, 132, 149, 157

    • DTCC (Depository Trust and Clearing Corporation) 63, 133, 175

    • Dutch bonds 125

    E

    • ECB (European Central Bank) 27, 32, 65, 120, 121

      • as repository of good collateral 60

    • EMIR (European Market Infrastructure Regulation) 95, 117, 119, 160–1

    • Euroclear 47, 122, 123, 133, 134, 136, 138, 139, 141

    • European Central Bank (ECB) 27, 32, 65, 120, 121

      • as repository of good collateral 60

    • European Market Infrastructure Regulation (EMIR) 95, 117, 119, 132, 160–1

    • explanatory panels:

      • “Accounting for pledged collateral in US and non-US jurisdictions” 8

      • “Analytics of the tax on derivative liabilities” 108–9

      • “Augmenting rate of return on security by pledging it for reuse” 25

      • “Beware effects of weakening collateral chains” 31–2

      • “CCP resolution and recovery: VM ‘gain’ haircuts” 104–5

      • “Central bank backstop with and without interoperability” 103

      • “Central-bank liquidity and VMGH” 165–6

      • “Custodians in the global financial system” 139

      • “Demand for high-quality liquid assets” 180

      • “The Fed, reverse repos and triparty/bilateral repo market wedges” 68–70

      • “Fed risk using wrong tools to tighten” 184–5

      • “Fed’s QE exit must avoid collateral damage” 66–8

      • “Financial plumbing and choice of balance sheet(s)” 12–13

      • “The financial plumbing: pledged collateral that can be reused by global banks” 176

      • “Floating-rate note ‘puts’ – are they forthcoming?” 88–9

      • “How QE can jam the financial plumbing” 65–6

      • “Lisbon move points to end of risk-free sovereigns” 151–3

      • “Securities lending and why this market is unlikely to bounce back” 141–3

      • “Taxpayers should not be made accountable for systemic failure” 112–13

      • “The 10–15 banks at the core for global financial plumbing” 26

      • “Undercollateralisation in the OTC derivatives market” 96

    • Exxon 74–5, 79

    F

    • Fannie Mae 55, 62, 78

    • Federal Reserve 65

      • balance sheet of 173–6, 175

      • lift-off by, and collateral reuse 171–88, 173, 174, 175, 177, 179, 181, 182 (see also monetary policy)

        • analytics 178–84

        • and high-quality liquid assets, demand for 180

        • introduced and discussed 171–3

      • as repository of good collateral 60

      • and wrong-tools risk 184–5

    • Fedwire 133, 138

    • figures:

      • AAA securities that came from private sector (1990–2009), increasing share of 43

      • asset sales, and no change in the size of the reverse repo programme 182

      • average cost of borrowing for the real economy (US and Europe indexes) 29

      • bank credit, funding of 37

      • bills/total issuance relative to 10-year yields minus 6-month yields 91

      • changing collateral paradigm 130

      • changing collateral space 121

      • collateral and financial plumbing 61

      • collateral rates in US 57

      • contraction in pledged collateral market and IS/LM shifts 59

      • current landscape of EU settlement and future landscape with T2S 137

      • deleveraging components – balance sheet and interconnectedness 26

      • equity long/short hedge fund position 18

      • Fed Funds policy rate and general collateral rate, pre-Lehman versus the present 174

      • financial lubrication (money and collateral), 2007–2015 85

      • financial plumbing 40

      • financial plumbing and bank–non-bank nexus 156

      • five-year CDS and euro interest-rate swap curve 150

      • funding of bank credit 37

      • funding costs for banks “in-the-money” with SSAs, illustrative example of 148

      • global volume of pledged collateral 7

      • how assignments lowered CDS spreads 149

      • how SIFIs offload most of their OTC derivative book to CCPs 100

      • hypothetical “waterfall” situation 162

      • illustrative example of funding costs for banks “in-the-money” with SSAs 148

      • increasing share of AAA securities that came from private sector (1990–2009) 43

      • IS/LM model 54

      • large banks’ use of hedge funds’ collateral 126

      • large reverse repo programme and shifts in the money curve 179

      • LOLR funds versus VMGH 163

      • main changes in the Fed’s balance sheet (2007 versus 2014) 175

      • monetary base and deposits at central bank (1959–2011) 76

      • new plumbing: large RRP and rusting of the plumbing 181

      • old collateral space 119

      • pledged collateral:

        • global volume of 7

        • received by European banks and Nomura (2007–15) 6, 177

        • received by US banks (2007–15) 6, 177

      • ratio of T-bills/total issuance by US Treasury since 1982 87

      • ratio of total US commercial bank liabilities to ultimate liquidity 82

      • ratio of total US financial intermediaries’ liabilities to ultimate liquidity 81

      • real interest rates via Taylor rule with/without Fed’s balance–sheet adjustment 60

      • relevant rates: Fed Funds, IOER, GCF and RRP 173

      • representative leverage levels in some HF strategies 20

      • selected EU countries 58

      • share of repo strategies (without derivatives) 19

      • sources and uses of collateral 23

      • T-bills/total issuance by US Treasury since 1982, ratio of 87

      • total US commercial bank liabilities to ultimate liquidity, ratio of 82

      • total US financial intermediaries’ liabilities to ultimate liquidity, ratio of 81

      • US total credit market assets (ratio to GDP) 77

    • Financial Conduct Authority 44

    • Financial Market Infrastructure Principles (CPSS-IOSCO) xi

    • Financial Stability Board 36, 110

    • Financial Times:

      • on Fed’s QE exit 66–8

      • on Fed’s risking wrong tools to tighten 184–5

      • on jamming financial plumbing 65–6

      • on Lisbon move and end of risk-free sovereigns 151–3

      • on taxpayers’ accountability for systemic failure 112–13

      • on weakening collateral chains 31–2

    • Financial Times Alphaville, on financial plumbing and choice of balance sheets 12–13

    • floating-rate note “puts” 88–9

    • flow-of-funds data 48–50

    • Freddie Mac 55, 62, 78

    • French Bonds 125

    • French Oats 70

    G

    • G-SIFIs (globally systemically important financial institutions) 12

    • GAAP (Generally Accepted Accounting Principles) 7, 99

    • Generally Accepted Accounting Principles (GAAP) 7, 99

    • German Bunds 12, 25, 66, 70, 80, 120, 125

    • global financial crisis:

      • analytics of collateral before and after 79–83

      • seen as watershed xi

    • global market infrastructure and custodians 132–4 (see also collateral; custodians)

    • globally systemically important financial institutions (G-SIFIs) 12

    • Goldman Sachs 16, 49, 175

    • Gresham’s Law 30, 80

    • G20 97, 156

    H

    • Hanmag Securities 160

    • HSBC 16

    I

    • IFRS (International Financial Reporting Standards) 7, 99

    • illustrations:

      • figures:

        • AAA securities that came from private sector (1990–2009), increasing share of 43

        • asset sales, and no change in the size of the reverse repo programme 182

        • average cost of borrowing for the real economy (US and Europe indexes) 29

        • bank credit, funding of 37

        • bills/total issuance relative to 10-year yields minus 6-month yields 91

        • changing collateral paradigm 130

        • changing collateral space 121

        • collateral and financial plumbing 61

        • collateral rates in US 57

        • contraction in pledged collateral market and IS/LM shifts 59

        • current landscape of EU settlement and future landscape with T2S 137

        • deleveraging components – balance sheet and interconnectedness 26

        • equity long/short hedge fund position 18

        • Fed Funds policy rate and general collateral rate, pre-Lehman versus the present 174

        • financial lubrication (money and collateral), 2007–2015 85

        • financial plumbing 40

        • financial plumbing and bank–non-bank nexus 156

        • five-year CDS and euro interest-rate swap curve 150

        • funding of bank credit 37

        • funding costs for banks “in-the-money” with SSAs, illustrative example of 148

        • global volume of pledged collateral 7

        • how assignments lowered CDS spreads 149

        • how SIFIs offload most of their OTC derivative book to CCPs 100

        • hypothetical “waterfall” situation 162

        • illustrative example of funding costs for banks “in-the-money” with SSAs 148

        • increasing share of AAA securities that came from private sector (1990–2009) 43

        • IS/LM model 54

        • large banks’ use of hedge funds’ collateral 126

        • large reverse repo programme and shifts in the money curve 179

        • LOLR funds versus VMGH 163

        • main changes in the Fed’s balance sheet (2007 versus 2014) 175

        • monetary base and deposits at central bank (1959–2011) 76

        • new plumbing: large RRP and rusting of the plumbing 181

        • old collateral space 119

        • pledged collateral, global volume of 7

        • pledged collateral received by European banks and Nomura (2007–15) 6, 177

        • pledged collateral, received by US banks (2007–15) 6

        • pledged collateral received by US banks (2007–15) 177

        • ratio of T-bills/total issuance by US Treasury since 1982 87

        • ratio of total US commercial bank liabilities to ultimate liquidity 82

        • ratio of total US financial intermediaries’ liabilities to ultimate liquidity 81

        • real interest rates via Taylor rule with/without Fed’s balance-sheet adjustment 60

        • relevant rates: Fed Funds, IOER, GCF and RRP 173

        • representative leverage levels in some HF strategies 20

        • selected EU countries 58

        • share of repo strategies (without derivatives) 19

        • sources and uses of collateral 23

        • T-bills/total issuance by US Treasury since 1982, ratio of 87

        • total US commercial bank liabilities to ultimate liquidity, ratio of 82

        • total US financial intermediaries’ liabilities to ultimate liquidity, ratio of 81

        • US total credit market assets (ratio to GDP) 77

      • tables:

        • definition of terms (Chapter 5) 77

        • hedge fund strategies 17

        • OTC derivatives market, undercollateralisation in 98

        • securities lending 2007–2015 (US$ billion) 22

        • SIFI’s financial statement, typical OTC derivative position from 115

        • sources of pledged collateral, velocity, and collateral, 2007, 2010–15 25

        • typical OTC derivative position from a SIFI’s financial statement 115

        • undercollateralisation in OTC derivatives market 98

    • interest on excess reserves (IOER) offered 55–6, 66–7

    • International Financial Reporting Standards (IFRS) 7, 99

    • International Organisation of Securities Commissions (IOSCO) 3, 103, 156, 159, 160

    • International Swap and Derivatives Association (ISDA) 99

    • intra-day liquidity, T2S and US triparty 134–41

    • investment, saving, liquidity preference and money supply (IS/LM) model 53–4, 54

      • collateral and monetary policy via 56–60, 59

    • IOER (interest on excess reserves)

    • offered 55–6, 66–7

    • IOSCO (International Organisation of Securities Commissions) 3, 103, 156, 159, 160

    • IS/LM (investment, saving, liquidity preference and money supply) model 53–4, 54

      • collateral and monetary policy via 56–60, 59

    • ISDA (International Swap and Derivatives Association) 99

    J

    • Japanese Government Bonds (JGBs) 12, 85, 122

    • Jefferies 175

    • JPMorgan 9, 16, 21, 47, 49, 63, 118, 123, 133, 139, 175

    L

    • LCH Clearnet 83, 103, 104, 159, 164, 165

    • Lehman Brothers 174

      • collapse in financial collateral since failure of 59

      • global liquidity before failure of 84

      • regulatory attention after failure of 3–11

        • and dealer-to-dealer collateral 7–9

        • and pledged-collateral market, size of 4–7

        • and rules on rehypothecation 10

        • and securitisation vehicles 10

        • and triparty repo collateral market and rehypothecation 9–10

    M

    • MMMFs (money market mutual funds) 62–3, 64, 123, 140–1, 179, 180

    • monetary policy:

      • and collateral 53–70, 54, 57, 58, 59, 60, 61

        • and central banks and collateral markets 60–4

        • introduced and discussed 53–5

        • and price of money and price of collateral 55–6

        • via IS/LM framework 56–60

      • and financial lubrication 83–6

        • pledged collateral and money aggregates 84–6, 85

      • and shadow banking xii, 47 (seealso shadow banking)

      • transmission of 171–88, 173, 174, 175, 177, 179, 181, 182

        • and high-quality liquid assets, demand for 180

        • introduced and discussed 171–3

    • money aggregates and pledged collateral 84–6 (see also pledged collateral)

    • money and the (adjusted) money multiplier 74–7

    • money market mutual funds (MMMFs) 62–3, 64, 123, 140–1, 179, 180

    • money and pledged collateral 1–3 (see also pledged collateral)

    • Morgan Stanley 16, 49, 102

      • financial statement of 148

    • N

    • netting fragmentation 114–15

    • Nomura 16

    O

    • old and new collateral space 118–20, 119, 120 (see also collateral)

    • Operation Twist 56, 120

    • OTC (over-the-counter) derivatives market 95–115, 98, 100, 115

      • cleared and non-cleared 114–15

      • and experiences of some sovereigns 147–9

      • introduced and discussed 95–7

      • move of, to CCPs 46, 97–106

        • alternative to 106–8

        • and central-bank backstop 102–4

        • and decrease in velocity rate 105

        • and inoperability 101, 103

        • and sizable collateral requirements 101–2

        • and utilities 105

      • and netting fragmentation 114–15

      • policy issues 111–12, 151

      • sovereign–bank nexus via 148, 149, 150

        • introduced and discussed 145–6

        • and new regulations 146–7

        • proposal to reduce 150–1

      • typical position, taken from SIFI’s financial statement 115

      • undercollateralisation in 96–7, 98

    • over-the-counter (OTC) derivatives market 95–115, 98, 100, 115

      • cleared and non-cleared 114–15

      • and experiences of some sovereigns 147–9

      • introduced and discussed 95–7

      • move of, to CCPs 46, 97–106

        • alternative to 106–8

        • and central-bank backstop 102–4

        • and decrease in velocity rate 105

        • and inoperability 101, 103

        • and sizable collateral requirements 101–2

        • and utilities 105

      • and netting fragmentation 114–15

      • policy issues 111–12, 151

      • sovereign–bank nexus via 145–52, 148, 149, 150

        • introduced and discussed 145–6

        • and new regulations 146–7

        • proposal to reduce 150–1

      • typical position, taken from SIFI’s financial statement 115

      • undercollateralisation in 96–7, 98

    P

    • panels:

      • “Accounting for pledged collateral in US and non-US jurisdictions” 8

      • “Analytics of the tax on derivative liabilities” 108–9

      • “Augmenting rate of return on security by pledging it for reuse” 25

      • “Beware effects of weakening collateral chains” 31–2

      • “CCP resolution and recovery: VM ‘gain’ haircuts” 104–5

      • “Central bank backstop with and without interoperability” 103

      • “Central-bank liquidity and VMGH” 165–6

      • “Custodians in the global financial system” 139

      • “Demand for high-quality liquid assets” 180

      • “The Fed, reverse repos and triparty/bilateral repo market wedges” 68–70

      • “Fed risk using wrong tools to tighten” 184–5

      • “Fed’s QE exit must avoid collateral damage” 66–8

      • “Financial plumbing and choice of balance sheet(s)” 12–13

      • “The financial plumbing: pledged collateral that can be reused by global banks” 176

      • “Floating-rate note ‘puts’ – are they forthcoming?” 88–9

      • “How QE can jam the financial plumbing” 65–6

      • “Lisbon move points to end of risk-free sovereigns” 151–3

      • “Securities lending and why this market is unlikely to bounce back” 141–3

      • “Taxpayers should not be made accountable for systemic failure” 112–13

      • “The 10–15 banks at the core for global financial plumbing” 26

      • “Undercollateralisation in the OTC derivatives market” 96

    • Pierpont Securities 175

    • pledged collateral 6, 7, 25, 177

      • and augmenting rate of return 25

      • global banks’ reuse of 176, 177

      • and money 1–3

      • and money aggregates 84–6

      • reuse of, by global banks 176, 177

      • size of market for 4–7

      • in US and non-US jurisdictions, accounting for 8

    • “pledged for reuse”, explained 2 (see also pledged collateral)

    • policy implications of shadow banking 47–8

    • policy issues:

      • and new collateral space 124–5

      • and sovereign–bank nexus via OTC derivatives 151

    • Potter, Simon 172

    • Principles for Financial Infrastructures 156, 159

    • Prudential Regulation Authority 44

    Q

    • quantitative easing (QE) 12–13, 27, 37, 39, 55, 59–60, 62, 80, 84, 85–6, 95, 117, 120, 122, 125

      • Fed’s exit from 66–8

      • and financial plumbing 65–6

    R

    • RBA (Reserve Bank of Australia) 125

    • RBS (Royal Bank of Scotland) 16

    • regulation:

      • and changing space of collateral 121, 121, 122

      • and collateral velocity calculation, difficulty of 30

      • and demand for collateral-based operations 59

      • and financial crises, major themes emerging from 133

      • and margin requirement for non-cleared trades 108

      • monitoring large non-banks 44

      • post-Lehman 3–11

        • and dealer-to-dealer collateral 7–9

        • and pledged-collateral market, size of 4–7

        • and rules on rehypothecation 10–11

        • and securitisation vehicles 10

        • and triparty repo collateral market and rehypothecation 9–10

      • and sovereign–bank nexus 146–7

    • rehypothecation 2–4, 8

      • rules on 10–11

      • and triparty repo collateral market 9

    • Reserve Bank of Australia (RBA) 125

    • reverse repos, and triparty/bilateral repo market wedges 68–70

    • Risk Management Association (RMA) 21, 132, 142

    • RMA (Risk Management Association) 21, 132, 142

    • Royal Bank of Scotland (RBS) 16

    • rules on rehypothecation 10–11

    S

    • safe assets, money and collateral 73–93, 76, 77, 81, 82, 85, 87, 91

      • (adjusted) money multiplier 74–7

      • collateral 77–83

        • and analytics of collateral – pre- and post-crisis 79–83

      • introduced and discussed 73–7

      • monetary policy and financial lubrication 83–6

        • pledged collateral and money aggregates 84–6, 85

      • and treasury bills 86–9

    • safe/liquid assets, shortage of 41–2

    • securities lending 21–2, 22, 66, 125, 139, 140, 141–3

    • Settlement Finality Directive 136

    • shadow banking:

      • economics of 35–51, 37, 40, 43

        • basic analytical framework 37–42

        • and collateral use and reuse 39–41

        • and dealer bank’s non-depository affiliate 42–4

        • and hedge funds 42–4

        • and money market funds 45

        • and OTC derivatives move to CCPs 46

        • and puts remaining at large 42–7

        • and qualified financial contracts 45–6

        • and safe/liquid assets, shortage of 41–2

        • and triparty repo 46–7

      • and flow-of-funds data 48–50

      • and monetary policy xii, 47

      • policy implications of 47–8

    • Shin, Hyun S. 30

    • short-term wholesale funding markets, vulnerability of, post-Lehman 36

    • SIBs (systemically important banks) 156

    • SIFIs (systemically important financial institutions) 44, 96, 97–9, 100, 105

    • Singh, Manmohan:

      • financial press articles by:

        • on Fed’s QE exit 66–8

        • on Fed’s risking wrong tools to tighten 184–5

        • on financial plumbing and choice of balance sheets 12–13

        • on jamming financial plumbing 65–6

        • on taxpayers’ accountability for systemic failure 112–13

        • on weakening collateral chains 31–2

    • Société Générale 16

    • sources of collateral 15–23 (see also collateral)

      • bank–dealer 22–3

      • and collateral sources 23

      • as of end 2015 24–6

      • equity strategies 16–18

      • hedge funds 16, 17, 18

      • not involving borrowing/leverage 20–1

      • repo strategies 18–20, 19

      • securities lending 21–2, 22

    • sovereign–bank nexus:

      • proposal to reduce 150–1

      • via over-the-counter (OTC) derivatives market 145–52, 148, 149, 150

        • introduced and discussed 145–6

        • and new regulations 146–7

        • proposal to reduce 150–1

    • State Street 21, 123, 141

    • systemically important banks (SIBs) 156

    • systemically important financial institutions (SIFIs) 44, 96, 97–9, 100, 105

    T

    • tables:

      • definition of terms (Chapter 5) 77

      • hedge fund strategies 17

      • OTC derivatives market, undercollateralisation in 98

      • securities lending 2007–2015 (US$ billion) 22

      • SIFI’s financial statement, typical OTC derivative position from 115

      • sources of pledged collateral, velocity, and collateral, 2007, 2010–15 25

      • typical OTC derivative position from a SIFI’s financial statement 115

      • undercollateralisation in OTC derivatives market 98

    • TARGET2-Securities (T2S) 134–41, 137

      • with collateral with custodians, and what is on loan 134–41

      • and intra-day liquidity 134–41

      • and legal connectivity 134–41

      • and US and European triparty markets 138–41

    • Tarullo, Daniel 36

    • Taylor rule 60, 84

    • Tett, Gillian 151–3

    • triparty repo 46–7

      • collateral market and rehypothecation 9

    • T2S (TARGET2-Securities) 134–41, 137

      • with collateral with custodians, and what is on loan 134–41

      • and intra-day liquidity 134–41

      • and legal connectivity 134–41

      • and US and European triparty markets 138–41

    U

    • UBS 16

    • Undertakings for Collective Investment in Transferable Securities (UCITS) 136

    • US Treasury debt-management strategy 91–2, 91

    V

    • variation-margin (VM) haircuts 104–5, 159–60, 161–6, 163

      • and central-bank liquidity 165–6

    • velocity 15–34, 17, 18, 19, 20, 23, 25, 26, 29

      • calculating methodology for 23–6

        • and collateral sources as of end-2015 24–6

      • and collateral sources 15–23, 23

        • bank–dealer 22–3

        • as of end-2015 24–6

        • equity strategies 16–18

        • hedge funds 16, 17, 18

        • not involving borrowing/leverage 20–1

        • repo strategies 18–20, 19

        • securities lending 21–2, 22

      • decrease in rate of 105–6

      • and deleveraging 26–30, 26

        • and difficulty of velocity calculation under new regulations 30

      • difficulty of calculating, under new regulations 26–30

      • methodology for calculating 23–6

        • and collateral sources as of end-2015 24–6

    • VM (variation-margin) haircuts 104–5, 159–60, 161–6, 163

      • and central-bank liquidity 165–6

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