Front Matter

Front Matter

Manmohan Singh
Published Date:
October 2016
  • ShareShare
Show Summary Details

Collateral and Financial Plumbing

Collateral and Financial Plumbing

Second Impression

Manmohan Singh

Published by Risk Books, a Division of Incisive Media Investments Ltd

Incisive Media

32–34 Broadwick Street

London W1A 2HG

Tel: +44(0) 20 7316 9000



© 2016 Incisive Media

ISBN 978 1 78272 317 2

British Library Cataloguing in Publication Data

A catalogue record for this book is available from the British Library

Publisher: Nick Carver

Commissioned by: Sarah Hastings

Managing Editor: Lewis O’Sullivan

Designer: Lisa Ling

Copyeditor: MFE Editorial

Typeset by Mark Heslington Ltd, Scarborough, North Yorkshire

Printed and bound in the UK by PrintonDemand-Worldwide

Conditions of sale

All rights reserved. No part of this publication may be reproduced in any material form whether by photocopying or storing in any medium by electronic means whether or not transiently or incidentally to some other use for this publication without the prior written consent of the copyright owner except in accordance with the provisions of the Copyright, Designs and Patents Act 1988 or under the terms of a licence issued by the Copyright Licensing Agency Limited of Saffron House, 6–10 Kirby Street, London EC1N 8TS, UK.

Warning: the doing of any unauthorised act in relation to this work may result in both civil and criminal liability.

Every effort has been made to ensure the accuracy of the text at the time of publication, this includes efforts to contact each author to ensure the accuracy of their details at publication is correct. However, no responsibility for loss occasioned to any person acting or refraining from acting as a result of the material contained in this publication will be accepted by the copyright owner, the editor, the authors or Incisive Media.

Many of the product names contained in this publication are registered trade marks, and Risk Books has made every effort to print them with the capitalisation and punctuation used by the trademark owner. For reasons of textual clarity, it is not our house style to use symbols such as TM, ®, etc. However, the absence of such symbols should not be taken to indicate absence of trademark protection; anyone wishing to use product names in the public domain should first clear such use with the product owner.

While best efforts have been intended for the preparation of this book, neither the publisher, the editor nor any of the potentially implicitly affiliated organisations accept responsibility for any errors, mistakes and or omissions it may provide or for any losses howsoever arising from or in reliance upon its information, meanings and interpretations by any parties.

For Komal and Kiran

About the Author

Manmohan Singh is a senior economist at the IMF. He writes extensively on topical issues including collateral and monetary policy, rehypothecation and velocity of collateral, deleveraging in financial markets, shadow banking, and counterparty risk in OTC derivatives. Singh has led the IMF’s workshops for official policymakers on strategic asset-allocation issues and the new financial regulatory framework. His articles have frequently appeared in the Financial Times, the Wall Street Journal, Euromoney, Risk, the Journal of Financial Infrastructures and other publications. His work experience covers several countries, including the UK, the US, Chile, India, Japan, Hungary, Poland, the Gulf countries and, more recently, peripheral Europe.


The financial crisis was a watershed for the way in which financial markets functioned and were regulated pre- and post-crisis. One of the most significant changes is the flight to security. The world of unsecure lending and uncollateralised trading clearly belongs to the past. This raises significant new challenges for the markets and their regulators

Collateral is a finite good. Nevertheless, legislators and regulators from across the world united in a flight to safety. As a consequence of the Basel Committee’s new bank capital requirements under Basel III and CPSS-IOSCO’s Financial Market Infrastructure Principles, financial counterparties, banks, clearing members and central counterparties are required to hold a far greater quantum of collateral than in the past to mitigate counterparty risk.

This gives rise to a number of fundamental issues:

  • ❑ What is “eligible” collateral and who determines its status?

  • ❑ How are we to deal with cross-border divergences?

  • ❑ Even more importantly, is the quantum of eligible collateral in the system actually sufficient to meet the regulatory requirements, and is it even possible to quantify that amount?

Industry calculations diverge widely. Public authorities have generally produced significantly lower calculations. A further area of debate is the extent to which collateral is “reused” in the system. This has given rise to misunderstanding in the market due to the loose use of terminology that should distinguish more clearly between collateral that has changed legal ownership under title transfer and that which has not. The market mechanisms in this area have given rise to a new area of attention, often pejoratively dubbed “shadow banking”. Often misunderstood, this system of intermediation provides important liquidity to the market and has a vital role to play. Of course, greater transparency is required as a minimum, if only to increase the understanding of the “shadow banking” sector and to identify any risks that it may harbour.

The link between collateral used by “shadow banking” entities and monetary policy is another area that has seldom been explored in great depth. The repo market is directly affected by monetary-policy measures and can have implications for the connection between regulated firms and activities of the “shadow banking” sector.

As always, new business opportunities will arise for enterprising firms. “Collateral-transformation”, “collateral highways” and “collateral hubs” are being promoted by a variety of entities, from custodians to central counterparties, to meet increasing market demands for collateral. This will inevitably give rise to closer regulatory scrutiny. Greater transparency – meaning increased reporting – is usually the starting point for regulatory demands.

The most important regulatory concern with the plumbing of the financial system will remain a possible failure in one of its critical components. Global regulatory attention has now turned to the recovery and resolution of central counterparties. Collateral plays an important role in preventing, but also managing, problems in such systemically important infrastructures.

Manmohan Singh has been at the forefront of those who have raised the increasing importance of collateral and has, over the years, consistently sought attention for the challenges the dynamics of the new global financial architecture present.

This book considers all of these challenges – and more – and is intended as an important contribution to the debate and analysis of this complex topic. It is timely and brings many thoughtful insights to the challenges that lie ahead.

Patrick Pearson, June 2014.

    Other Resources Citing This Publication