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November 08, 2017

ECB published occasional paper on tracing the European structured finance counterparty networks. The paper traces and describes the connection between issuers and service providers, using a new database covering the majority of public asset-backed securities (ABSs) and covered bonds (CBs) outstanding between August 2008 and March 2017.

The paper examines a range of counterparty services, which are distinguished by activity and by their importance for the smooth functioning of the ABS or CB instruments. The paper focuses on services that are of high importance for the functioning of the program and the services that should be provided by non-affiliated entities, with the main focus being the network arising between issuers and structured finance firms supplying this subset of services. The paper compares the extent of close links in the collateral network (between issuers and pledgers) with the extent of close links in the structured finance counterparty network (between issuers and counterparties). From a time series perspective, the extent of close links in important ABS and CB counterparty services appears relatively stable over time, despite the large changes in issuance and amounts outstanding of these instruments since 2008. The paper also illustrates a different form of concentration: the tendency to rely on a few non-affiliated firms, when ABS or CB issuers contract structured finance services from entities outside their banking group. This paper examines the tendency of issuers to retain their own instruments for use as collateral and compares this with issuers’ decisions to rely on themselves or intragroup entities or on non-affiliated entities for the provision of key structured finance counterparty services.

The analysis indicates that ABS and CB issuers are highly reliant on affiliated counterparties (close links) to provide the key services for ABSs and CBs, especially when programs are larger and/or are retained by the issuer for use as collateral with the Eurosystem. When only “non-close links” across banking groups are considered, instances of reliance on just a few service providers have gradually decreased in number, with a more balanced system developing over time. The paper finds similar results for networks based on the use of securities as Eurosystem collateral. These findings help demonstrate the importance of the Eurosystem’s risk management framework for ABSs and CBs, in addition to supporting the orientation of recent regulatory efforts at the European level. The findings help justify the Eurosystem’s available tools to mitigate the risks presented by ABSs and CBs, whether in the form of collateral pledged with the Eurosystem or of instruments considered for purchase under the respective purchase program.

Related Link: Occasional Paper (PDF)

Keywords: Europe, Securities, Banking, Counterparty Network, Collateral, Structured Finance, Covered Bonds, Asset Backed Securities, ECB

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