US counsel react to FSB collateral re-use study

Author: Edward Price | Published: 7 Mar 2016

The Financial Stability Board (FSB) is studying collateral re-use as a part of its work on the regulation of the shadow banking sector. Counsel in the US are considering the FSB proposals in the context of how shadow bank regulation may evolve.

Last month, the FSB released a report Possible Measures of Non-Cash Collateral Re-Use. The report is pitched as an attempt to increase regulatory understanding of collateral re-use practices. As such, it focuses on financial stability concerns.

Collateral re-use is the practice of using a pool of assets for use as collateral in more than one transaction, reducing transaction, liquidity and funding costs as a result. 

The report acknowledges that collateral re-use plays an important role in financial markets, in that it increases the overall availability of collateral. However, it’s concerned with potential risks, noting how reusing collateral can increase interconnectedness among market participants and so contribute to...