OFR Short-term Funding Monitor - Insights

Collateral

Short-term funding markets often require that borrowers pledge securities as collateral against the possibility they may default on a loan. Types of collateral vary and can influence the rate of return charged for short-term funding and the willingness of lenders to extend such funding. The types of securities that appear as collateral can also indicate the security positions for which borrowers need financing. These charts present insights into the types of collateral used to secure funding across various short-term funding markets.

Primary dealer failures to receive by collateral type

Aggregate failures to receive securities for primary dealers broken out by type of collateral

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Primary dealers serve as intermediaries in securities markets, receiving securities from sellers and delivering them to buyers. They also serve a unique role in purchasing Treasury securities at auction and acting as a counterparty to the Federal Reserve. In general, sellers have a limited time to deliver securities to settle any obligations they have made to primary dealers. For a variety of reasons, sellers may be unable to meet these obligations—for instance, if they sell a security short that they do not own and are then unable to obtain the security for delivery. The unmet obligation to a dealer is recorded as a failure to receive. The seller may be subject to settlement charges as a result.

Failures to receive are more common when there is underlying illiquidity in the securities market, which makes it more difficult for short-sellers to buy the securities they are obligated to deliver. High failures to receive in an asset class may indicate underlying illiquidity in that asset class. Failures can also cascade: one firm failing to receive a security promised to another may cause the second firm to fail on obligations to a buyer. These cascading failures can exacerbate any lack of liquidity in the underlying security.

Series Used

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Suggested Citation

Office of Financial Research, “OFR Short-term Funding Monitor,” refreshed daily, https://www.financialresearch.gov/short-term-funding-monitor/ (accessed ).