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Finance: Collateral Transformation

House of Lords written question – answered on 20th July 2011.

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Photo of Lord Myners Lord Myners Labour

To ask Her Majesty's Government whether collateral transformation poses an added risk to financial systems; and whether steps will be taken to collect and publish data and enhance transparency in this area.

Photo of Lord Sassoon Lord Sassoon The Commercial Secretary to the Treasury

Ongoing regulatory reform is likely to change significantly the quantity and quality of collateral that market participants require as part of their business.

Potential risks associated with this have been noted by the UK authorities. In its June 2011 Financial Stability Report, the Bank of England discussed transactions involving collateral transformation, described as collateral swaps.

The Financial Policy Committee (FPC) has advised the Financial Services Authority that its bank supervisors should monitor closely the risks associated with these types of transactions. The FPC also expressed its support of international initiatives to improve the availability and quality of data on intra-financial system activity.

The UK authorities are working both domestically and internationally to assess any risks that may be presented by the way that firms access the collateral they need, with a view to ensuring that those risks are appropriately mitigated in an internationally consistent manner.

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