Rely on the most comprehensive, up-to-date legal content designed and curated by lawyers for lawyers
Work faster and smarter to improve your drafting productivity without increasing risk
Accelerate the creation and use of high quality and trusted legal documents and forms
Streamline how you manage your legal business with proven tools and processes
Manage risk and compliance in your organisation to reduce your risk profile
Stay up to date and informed with insights from our trusted experts, news and information sources
Access the best content in the industry, effortlessly — confident that your news is trustworthy and up to date.
Find up-to-date guidance on points of law and then easily pull up sources to support your advice with Lexis PSL
With over 30 practice areas, we have all bases covered. Find out how we can help
Our trusted tax intelligence solutions, highly-regarded exam training and education materials help guide and tutor Tax professionals
Regulatory, business information and analytics solutions that help professionals make better decisions
A leading provider of software platforms for professional services firms
In-depth analysis, commentary and practical information to help you protect your business
LexisNexis Blogs shed light on topics affecting the legal profession and the issues you're facing
Legal professionals trust us to help navigate change. Find out how we help ensure they exceed expectations
Lex Chat is a LexisNexis current affairs podcast sharing insights on topics for the legal profession
Discuss the latest legal developments, ask questions, and share best practice with other LexisPSL subscribers
This article by David Murphy was originally published in Butterworths Journal of International Banking and Financial Law (JBFIL), under the title 'The risks and roles of Financial Collateral'. In it David Murphy reviews the principal risks that collateralisation brings both to the parties involved and to the financial system as a whole.
Collateral has a central role in the post-crisis financial system. Unsecured interbank markets have declined, so secured funding transactions whether private or with central banks have become the most important conduit of liquidity to the financial system. At the same time, collateral became a key feature of the post-crisis regulatory reforms: it will be mandatory for many bilateral OTC derivatives and is already required for centrally cleared transactions. This ubiquity has led to concern as to whether there is enough collateral to meet all the roles it must play. In this article we review the key features of secured transactions, setting out the principal risks that collateralisation brings both to the parties involved and to the system. This discussion is illustrated by two of the key failures during the crisis, AIG and Lehman Brothers. We also examine the structural features of the secured financing market, noting in particular an important lesson to be gleaned from the size of large US dollar tri-party repo portfolios.
We then turn to the post-crisis financial system in detail, highlighting the role of collateral in the principal reforms made to wholesale markets. The paper ends with a discussion of the risk profile of the financial system that will result once these reform efforts are complete.
Financial collateral is typically used when one party has (or may in the future have) a credit exposure to another which is not mutually acceptable. The lender may not wish to have substantial exposure to non-performance by its counterparty. The exposure is mitigated by means of a financial asset. This asset, the collateral, is posted for the benefit of the party owed. If we assume that
Free trials are only available to individuals based in the UK
* denotes a required field
**excludes LexisPSL Practice Compliance, Practice Management and Risk and Compliance. To discuss trialling these LexisPSL services please email customer service via our online form. Free trials are only available to individuals based in the UK. We may terminate this trial at any time or decide not to give a trial, for any reason. Trial includes one question to LexisAsk during the length of the trial. See our full terms here.
Access this article and thousands of others like it free by subscribing to our blog.
Read full article
Already a subscriber? Login
0330 161 1234