Since the securities furnished as collateral are generally used several times over, this creates long chains of transactions involving many different participants – participants in both the shadow banking system and the regular banking system. This adds to the degree of interconnectedness within the financial system, increasing the risk of contagion effects.
To counter this risk, the European Commission put forward a proposal for a regulation at the end of January. Under the proposed rules, securities would only be reusable if the provider of collateral agreed to it. These moves to put a brake on systemic risk in the securities financing markets are without doubt a step in the right direction.