Emerging Market Securities Access to Global Plumbing

IMF Working Papers, March 26, 2021

Source details

Research question: What are the constraints that have stalled EMs efforts to reuse their securities in international financial centers?
Scope: Economics of collateral re-use and the present institutional structure in Asian and Latin American countries.
Key institutional reference: Eurozone collateral pool and its role in incentivizing asset acceptance in global plumbing.

Pledgeability:
- Empirical investigation suggests pledgeability enhances financial stability and reduces dollar funding risk.
Asset acceptability:
- Many securities (e.g., BTPs, Italy) are acceptable in London but not EM securities.
Market structure and incentives:
- The Eurozone collateral pool is explained as a mechanism that incentivizes EMs (and other issuers) by expanding acceptable collateral sets.

Legal and institutional barriers in Asian and Latin American countries limit the reuse of securities in international financial centers.
Differences in acceptance criteria across international financial centers create fragmentation (example: BTPs accepted in London; many EM securities are not).
Operational plumbing aspects:
- Liaison with International Central Securities Depositories (ICSDs) is a crucial institutional relationship for access.
- Global banks’ balance sheet capacity to intermediate cross-border collateral is a critical market capacity constraint.

Improve pledgeability frameworks in EM jurisdictions to enhance financial stability and reduce dollar funding risk.
Engage with ICSDs to address operational and custody-related barriers to cross-border collateral mobility.
Strengthen coordination with global banks and consider measures to expand banks’ capacity to intermediate cross-border collateral flows.

Successful development depends on:
- EMs’ liaison with ICSDs to align operational and legal arrangements.
- Global banks’ willingness and balance sheet capacity to intermediate cross-border collateral.
Without improvements in pledgeability, ICSD access, and intermediary capacity, reuse of EM securities in global plumbing is likely to remain constrained.

Emerging Market Securities Access to Global Plumbing — Gongpil Choi, Federico Ortega, Manmohan Singh (March 26, 2021)