Cross-cutting issues
54
5.3.2
Risks
Securities lenders face the risk that the borrower may be unable to return the security and that
the collateral and the indemnity provided by the intermediary are insufficient to acquire in the
market place the non-returned security. To mitigate against such risk, lenders engage typically in
on-going robust counterparty risk assessment and directly or indirectly through their agent active
collateral management, requiring larger haircuts if risks are deemed to have increased.
6
In addition, those lenders choosing to receive cash as collateral face the so-called cash collateral
reinvestment risk, i.e., the risk that the lender suffers a loss on the re-investment of the collateral.
According to Dive et al. (2011), prior to the financial crisis, in many instances, “
agent lenders
managed the majority of these cash reinvestments. They often managed ‘pooled’ programmes that
grouped cash collateral from a number of beneficial owners together and reinvested the cash
according to a set of investment guidelines regarding credit and liquidity risks
”.
The issue of rehypothecation is sometimes mentioned as creating a particular risk but stakeholders
consulted during the project noted that this is not an issue provided sufficient collateral of high
quality is given by securities borrower.
Since the financial crisis, cash collateral is managed much more prudently and involves much less
of a maturity transformation than before the crisis. For example, according to data from Data
Explorers, the median maturity of cash reinvestment programs has fallen from a high of more than
150 days in 2007 to about 25 days in 2011.
Data Explorers also provide information on the volume of activity, cash collateral, etc. among the
major institutions undertaking securities lending and provide information to Data Explorers on
their activity. However, this is proprietary data which is not accessible to less informed participants
who engage only episodically in securities lending. As a result, the latter may not always take the
most appropriate decisions.
Another key risk resulting from securities lending is that institutions having borrowed securities
are under no obligations to make provide information in their balance sheets on the extent to
which the securities shown in their balance sheet are subject to a legal claim by a securities lender.
This reduces the value of the balance sheet information for market transparency and makes the
assessment of counterparty risk more complex and risky.
Securities lending also creates a wider systemic risk through increasing the interconnectedness of
various segments of the financial industry. This may cause, or at least, facilitate contagion.
6
Unfortunately, in contrast to the detailed information available from the ISDA margin surveys for OTC derivatives (see for example
ISDA 2012), there exist no public data on the size of the size of the margin and the extent to which collateral is rehypothecated.
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