Collateral 'map' drawn up by US Treasury's OFR

Collateral 'map' drawn up by US Treasury's OFR

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A map of collateral flows in the financial system is being developed by the US’s Treasury's Office of Financial Research (OFR).

The group, set-up in 2010 after the Dodd-Frank act was signed into law, published its latest paper on Thursday.

Much of the OFR's work so far has been done to shine a light in the 'dark corners' of the financial system to see where risks are.

Collateral - assets pledged by a borrower to a lender, usually in return for a loan - is the latest focus.

Post financial crisis, the collateral landscape has changed markedly.

Repo markets and related collateral have diminished, while CCPs and their high-quality collateral standards have moved front and center.

Because of these changes, the OFR says the historical vulnerabilities of collateral do not track those that have emerged since the crisis.

“The collateral map allows us to understand the sources of collateral and how collateral moves through the financial system,” said Morgan Stanley’s Andrea Aguiar, who has been working with the OFR on the study.

"Once populated with data, the map will show collateral-related vulnerabilities, possible paths of contagion, and alternative paths for critical collateral flows if one path becomes congested."

Well-known financial author and academic Rick Bookstaber has also been working on the project. 

Specifically, the map details the internal workings of a bank/dealer and its central role in intermediating the flow of collateral.

The bank/dealer’s prime broker, for example, is highlighted orange, as the conduit of collateral from the hedge funds.

The financing desk (blue) is the conduit for securities lending and repo and the derivatives desk (green) handles futures, forwards, swaps, options, and related activities.

Another key aspect of the collateral map is that it represents the pipelines for collateral flows.

“The pathways that collateral takes are two-way streets: when there is funding in one direction, there is a flow of collateral in the other direction,” adds Dror Y. Kenett, interdisciplinary researcher at OFR.

“As secured funding moves from cash providers to end users through the bank/bealer, the collateral map shows collateral moving from end users back to cash providers.”

OFR’s paper, which can be found here, also examines AIG’s $24.4bn loss in the third quarter of 2008, half from securities lending.

AIG’s near-failure was a prominent and iconic event in the financial crisis.

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