Such chains tend to increase the web of interconnections in the financial system that, in some circumstances, can increase the likelihood or severity of systemic stress. For example, movements in collateral values can trigger margin calls and fire sales of assets, and thus activities that depend on market-valued collateral can be vulnerable.
The Financial Stability Board is currently considering reforms for margins on securities financing transactions. Other interconnections involve exposures to counterparty default. The new regulatory regime for derivatives, which I will discuss in a moment, seeks to mitigate counterparty risk. It is often said that stronger regulation of the banking sector will cause activity to move outside the perimeter of regulation.