Risk Mitigation in Securities Lending and REPO

Mitigating Investment Risks in Institutional Lending and REPO

by Orion Karl Daley. okdaley (at) gmail.com

Please see the attached three minute slide show. Your learned opinion is welcomed as well as sharing this.

Summary:

New types of Default Swap Contracts are proposed that are intended to mitigate risk in institutional asset management. They are to consist of insurance policies that by design will not impact an insurers reserves.

The slide show is intended to be self explanatory and I am not from a bank of insurance company. My interest is from the standpoint as an engineer.

The idea in summary is that for any institutional lending contract ( Sec Lending or REPO ) , the lending institution can obtain an insurance policy from an insurer.

The original intent of the swaps is 1- to allow lender risk mitigation while opening the markets further: i.e – increase lending at the institutional level. And 2- to further a revenue stream for insurer’s in writing such policies.

When an insured lending contract is in default, while the insurer pays on the policy, the lending institution provides a long term loan to them for the same amount.

The loan is to remove the exposure to the insurer’s reserves, while enabling them to meet their commitments of the insurance policy.

Other assumed benefits:

From the lenders standpoint, the loans noted to an AA rated insurer are an AA rated asset.

– the accumulation of AA rated assets ( loans from the bank ) offers the opportunity to create ‘AA’ rated CDOs.

About The M3 Money Supply Space and trickle down

Although the Fed sees M3 as opaque ( turning a blind eye, in a state of denial, or like sticking your head in the sand ) , this is the space that institutional lending could find itself in.

With effective risk mitigation and ‘AA’ rated assets, I would think that the M3 Space could be stabilized, where if not, it would affect M2 and M1: i.e – the recent implosion.

I further assume that as M3 is stabilized, this would improve the lending capacities in M2 and M1: i.e – as toxic assets become offset by ‘AA’ rated ones on balance sheets.