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Collateral Reuse and Systematic Risk
$50.00 / year
In a typical, Collateralised Securities Financing Transaction, the lender seems secure, holding sufficient collateral. What happens, if this person, Reuses the securities received as collateral, and borrows against those same securities? The first lender seems secure, from holding collateral. But this collateral taker, decides to borrow, becoming a collateral provider in the process. The second lender feels secure, from holding collateral. But the second collateral taker again, decides to borrow, becoming a collateral provider in the process. The third lender feels secure now, from holding collateral. If ONE Entity defaults, ALL collateral gets recalled at the same time: and there is only set of securities, in reality.