Financial Services and Risk Management Subcommittee: Funding Map Recommendation

Summary

Recommendation:

The OFR should consider building funding maps that depict the flow of funds among market participants, their inter-linkages, and potential pressure points for key sectors of financial markets.

Rationale:

The propagation of systemic risk is fueled by the funding connections of financial market participants. The Risk Management subcommittee recommends that the OFR develop a map that depicts the flow of funds among market participants, which can be used to identify key linkages and inter-dependencies and potential pressure points in future systemic crises. The subcommittee has developed a proof-of-concept for such a map for the flow of funds to and from US broker-dealers, to illustrate a critical nexus in wholesale funding markets. Our recommendation is that the OFR evaluate the usefulness of funding maps, assess whether they can be populated and updated with data either already collected by other Federal agencies or potentially available from market participants, and consider whether they should be extended to sectors beyond broker-dealers.

Background

Overview:

• The Liquidity and Funding Working Group of the FSRM focused its work efforts around the development of a “Funding Map,” which illustrates the funding risks across financial market participants
• A Funding Map is a graphical balance sheet view of the primary business activities and funding sources of a financial market participant
• The Funding Map highlights key funding risks associated with the funding sources used by financial market participants, providing key insight into potential weaknesses and risks that could affect overall market financial stability

Approach:

• The Working Group began by choosing “Bank / Dealers” as the sample financial market participant
• First, the Working Group identified the primary business activities and funding sources for Bank / Dealers
• Subsequently, the Working Group defined the key participants that interact with Bank / Dealers, grouping these into three categories: Cash Providers, Securities Lenders, and Leverage Takers
• Given some activities require an intermediary between the Bank / Dealer and its counterparties, these were also identified and grouped into three categories: Triparty Agents, Repo Central Counterparties, and Clearing Exchanges
• Directional arrows were added to connect external participants and intermediaries to the Bank / Dealer, reflecting the exchange of cash and/or securities
• As a next step, the Working Group evaluated the durability of the Bank / Dealer’s funding sources, categorizing these into less and more durable funding types
• The risks identified with less durable funding sources were highlighted and described on the Funding Map

As a final step, the group recognized several stress triggers that could amplify these funding risks and graphically represented the effect of each trigger on the participants and Broker / Dealer

Benefits

The Funding Map identifies funding sources, potential stress points, and stress triggers / risk amplifiers

• Simple view of business activities performed by financial market participants
• Directional display of the exchange of cash or securities between participants
• Clear identification of less durable funding sources
• Defined stress triggers and amplifiers of funding risks between participants

Recommendations

• The Working Group recommends that the OFR, working in coordination with the Federal Reserve and other regulatory agencies, prioritize collecting data to complete the funding map for the Bank / Dealer channel
  • The data could be compiled from individual firm participants. For example, Bank/Dealers could provide the amount of Prime Brokerage client cash (free credits) used to fund other clients’ margin loans, while securities lenders could provide the volume of securities loaned, cash and non-cash collateral accepted, and indemnified repo provided back to broker-dealers
• The group also recommends that the OFR build upon this existing work by creating a Funding Map for other key financial market participants, which would provide a comprehensive view and understanding of the funding risks within the financial market as a whole and the potential for contagion given the interrelationship of participants
  • The Funding Map can also be expanded to incorporate international linkages. For instance, the extent to which US money market participants provide sources of funds to foreign (non-US) global banks or broker dealers
• The group recommends that the following market participants take priority:
  • Money Market Funds
  • Mortgage Originators
  • Credit Insurance
• The Working Group believes that this Funding Map could be leveraged in a number of different ways and welcomes further discussion