Securities financing transactions (SFTs) – including repurchase agreements (repo), securities lending, buy/sell backs and margin lending – are foundational to the functioning of modern financial markets. They support the day-to-day distribution of liquidity, enable collateral to move efficiently across cash and derivatives markets, and play an important role in the transmission of monetary policy. SFTs provide secure financing channels that market makers, asset managers, hedge funds, pension funds and banks rely on to manage financing, leverage and collateral needs, thereby supporting healthy secondary-market liquidity and the functioning of key benchmarks, such as the Secured Overnight Financing Rate (SOFR). Within this ecosystem, securities lending plays a distinct role by enabling transactional short selling and providing market participants with access to specific securities needed for settlement, hedging or portfolio management.

Despite this central role, experience across the past several decades has shown that secured funding markets can come under pressure during periods of elevated volatility. Events such as the 1998 Long-Term Capital Management episode, the 2007-2009 global financial crisis, the 2019 US repo rate spike, the 2020 COVID-19 liquidity dislocation and the 2022 UK liability-driven investments crisis illustrate how demand for secured funding can rise as balance sheet capacity becomes more constrained. These dynamics can challenge market functioning and increase reliance on official-sector liquidity backstops. Beyond the effects of volatility itself, several long standing structural frictions – which become more binding as volatility rises – continue to limit the ability of SFT markets to adjust smoothly during stress.

There has been substantial progress to make the system more robust since the financial crisis. Post-crisis reforms, including expanded central clearing, strengthened risk management practices and enhanced central bank facilities, have improved the resilience of SFT markets. However, divergent capital frameworks, differing treatment of SFTs relative to derivatives, leverage ratio constraints, liquidity requirements and fragmented reporting regimes can collectively reduce balance-sheet flexibility, impede collateral mobility and increase overall costs for SFT intermediation, particularly during periods of heightened volatility. While these frictions may be manageable in normal conditions, they can become more binding as volatility rises.

This paper identifies the structural and regulatory drivers that influence secured funding availability under different market conditions and outlines targeted advocacy priorities aimed at supporting resilient, efficient and well-supervised SFT markets. It also considers the differences in accounting, data and prudential frameworks for SFTs and derivatives – along with emerging digital asset developments – that can create barriers to holistic trading book risk management, including efficient cross-product netting sets, liquidity management and collateral efficiencies.

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