The Use of Collateral in the Securities Markets

During the last decade we have seen a significant growth in the use of collateral in the wholesale financial markets. Collateral is increasingly used in lending, securities and OTC derivatives trading and in payment and settlement systems to mitigate credit risk.² At the end of 2006, the amount of collateral used in privately negotiated derivatives transactions and related margin activities alone was estimated to be approximately USD1.335 trillions.³ Similarly, the repo market has been growing rapidly over last couple of years. To give one example, in December 2005 the EU repo market had a total value of EUR5.883 billion, compared to a total value of EUR1,863 billion in June 2001.4 Another trend is the increasing use of complex and innovative products for the transfer of credit risk such as credit default swaps (CDS) and collateralised debt obligations (CDO). This Chapter examines the use of financial collateral in the securities markets, with particular emphasis on reuse of financial collateral. Other risk management techniques are also discussed.