Securities Lending and Repos
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Securities lending and the repo market are often seen as opaque and un-transparent. They are however both key in the functioning of our financial system as it exists today. The 2007–2009 financial crisis demonstrated how sensitive they are and how liquidity almost overnight can dry up. The segments have seen material reforms in recent years which the industry is still digesting. After having reviewed them, there is a sense that the segment might have been prone to multi-layered overregulation also in spaces where no real action was needed. Part of that can be explained by the fact that often different financial techniques and risks come together in these segments. But overregulating complex markets triggers its own set of complications. Introducing haircuts on and demanding higher quality collateral puts (or might put) strain on the collateral supply in the market. Reducing leverage in itself is a good thing, but where does that liquidity go? Like in most cases, there are many ways to get it wrong and one or very few ways to get it right.