Collateral is one of the building blocks on which the financial markets are constructed. Used for a number of purposes - including trading with central counterparties (CCPs), secured funding with market counterparties and central banks, OTC derivatives margining and settlement - the role of effective collateral management in monetising assets has never been more important.
Until now, policy makers have tended to ignore the complex collateral plumbing that is fundamental to lending and enabling growth in the economy. Attention is now focussed on this important issue.
This book, the first of its kind, is written by the leading authority on collateral Manmohan Singh. He leads you through the complex world highlighting the importance of financial plumbing and provides a practical understanding of how financial collateral moves across jurisdictions. Also, the discussion on restricting collateral velocity and how it links to monetary policy rate cycle is original.
This is a must have guide to navigating the future as rules and regulations for the global financial markets are redrawn.
Through a thorough examination of the role collateral plays in the market you will gain a deeper understanding of complex and important themes that are likely to remain topical in the near future.
- Book - 9781782720898 / eBook - 9781782721802
- Publish date
- 30 Jun 2014
- 155mm x 235mm
Table of contents
- Collateral in Financial Plumbing
- Collateral Velocity
- The Economics of Shadow Banking
- Collateral and Monetary Policy
- Money, Collateral and Safe Assets
- Collateral and the OTC Derivatives Market
- The Changing Collateral Space
- The Collateral Infrastructures
- Sovereign Bank Nexus via Collateral use in OTC Derivatives
- When Financial Plumbing Fails - Recovery and Resolution of CCPs
"This book provides an authoritative and important reminder that 'collateral' is the oil in the engine of global financial markets. It describes how collateral has morphed over time, its importance for the plumbing of the financial sector and its current monetary policy nexus. Manmohan Singh covers all the bases that the market, its infrastructure, central bankers, legislators and regulators should focus on. The chapter on 'shadow banking' in particular is the first comprehensive perspective on its important intermediation role for the financial sector. He has expertly peered into the future to consider the possible consequences of collateral paucity or the failure of a CCP – too important to fail, too big to save? This book weaves a rich and unique tapestry of a complex subject in an accessible manner."
Patrick Pearson, Acting Director of Financial Markets, European Commission
“Manmohan’s thought-provoking work shines a much-needed light on the neglected, yet highly critical, plumbing of the financial system.”
Guy Debelle, Assistant Governor (Financial Markets), Reserve Bank of Australia and Chair of the BIS Markets Committee
"Manmohan Singh is widely acknowledged as the global thought leader on collateral and financial market infrastructure. This book is an extremely useful guide to this crucial area of financial market design and policy."
Darrell Duffie, Graduate School of Business, Stanford University
"I’ve been a fan of the IMF’s Manmohan Singh since FT Alphaville started highlighting his work on the nature and velocity of collateral in the shadow banking system in 2009. As one of the architects of the global system of cross-border, cross-currency collateral and margin for nearly twenty years, collateral is a topic very near and dear to my heart. Collateral and Financial Plumbing, available from Risk Publications, brings together the various streams Singh has explored in connection with collateral markets and their role in monetary policy, macro-economic stability, financial market liquidity and the emergent infrastructure of the post-crisis financial system. It is not a book for the novice or financial dilettante, but the serious reader with a sound grasp of the players in the global markets will find this book very rewarding. The individual chapters reveal the mechanisms by which the world is financed and re-financed – and occassionally shocked into illiquidity – and examine the central bank and supervisor responses which alter the fundamental workings of the system. The book should be mandatory reading for central bankers and capital markets supervisors as it unveils the mechanisms by which unconventional interventions in the US, UK and EU have floated financial markets back to heady pre-crisis levels while leaving systemic weaknesses unresolved, concentration risks more concentrated, and ‘puts’ on the taxpayer still looming in the shadows of shadow banking.
The book starts with the convincing premise that the monetary policy models taught in Economics 101 are now simplistic and misleading. Central banks no longer control the amount of money in the economy by manipulating M1, M2 and M3 monetary aggregates. The collateral values of C1 – high quality liquid assets – and C2 – high quality assets – circulating in the shadow banking system and settling through the 15 largest global dealer banks greatly expand and distort monetary credit conditions. Singh’s contribution of measuring the quantity and velocity of collateral through tracking re-use in the shadow banking system is an important tool for monitoring the health of the financial system. The rapidity with which C1 and C2 assets can be re-priced and rejected by investors, and then reflated by central bank unconventional interventions, means that volatility and liquidity in collateral markets now determines the timing, scope and fallout of systemic shocks. Unconventional interventions have shifted the focus and impact of central bank policies away from the performance of the underlying real economy in wages, production and trade, perhaps permanently.
In this light 2008 becomes a mammoth margin call on global financial markets as investors holding high quality liquid assets froze them in custody silos rather than lend them or permit rehypothecation to suspect counterparties at a time when other asset classes, including government debt, currencies and AAA rated securities were being widely re-scrutinised and re-valued. Central bank innovative and unconventional policies to re-lubricate illiquid banks and markets post-crisis have shifted the balance of power toward the dealers and custodians at the centre as beneficiaries of unconventional easing while undermining less connected investors and intermediaries at the periphery. As Governor Ragurham Rajan of the Reserve Bank of India has very publicly noted, the extreme monetary easing of QE1, QE2 and QE3 has given the appearance of stabilising financial markets at a cost of huge distortions in wealth valuation and allocation by ill-transparent mechanisms under the direction of unaccountable monetary theorists.
Successive chapters in the book examine the mechanisms for unconventional easing, innovations in monetary policy tools, regulatory change in the OTC deriviatives markets, risk management through central counterparties (CCPs), efforts to standardise and unify collateral pools through international central securities depositories (ICSDs), and the changing topography of markets as post-crisis regulatory reforms begin to bite and constrict collateral incentives and availability. Usefully the book reproduces Singh’s series of commentaries in the Financial Times which demonstrate the evolution of his insights and policy prescriptions over the past seven years as illustrative of the key points in these chapters.
Singh is not shy about promoting his preferred policy responses over those chosen by the Basel Committee and IOSCO. He prefers ‘levies’ on uncollateralised exposures to mandatory clearing through CCPs, and is sceptical of the value of moves to limit the ‘put’ of taxpayer bailouts for the next financial crisis as risks concentrate further in too-big-to-fail dealers and too-important-to-fail CCPs. I don’t always agree with his characterisation of the ‘plumbing’ of the financial system (for example, he does not address the fact that ICSDs and CCPs both use the same 15 global dealer banks as sub-depositories for cash and securities theoretically held in their low-risk custody), but he certainly made me think long and hard about the financial architecture as it now stands, as it is evolving in the context of post-crisis intervention and regulation, and as it might be if it were re-designed from first principles to serve the real economy and be fit-for-purpose in capital markets."
Kathleen Tyson Quah, Granularity Ltd