Introduction

This chapter provides an overview of the risk management issues arising in central bank repurchase operations conducted to implement monetary policy. The topic will be further deepened in the next three chapters. In some sense, Chapters 7 to 10 are more focused on central banks than the rest of the book, since the risk management design of monetary policy operations is obviously also guided by policy needs. Still, many of the considerations made in this chapter are also relevant for any institution entering an agreement on the collateralization of its exposures with counterparties. In such a collateral agreement, a set of eligible assets needs to be defined, as well as risk mitigation measures, including valuation principles, haircuts and limits. The counterparties to the agreement are then constrained by it with regard to the type and amount of collateral they submit to cover exposures. However, typically, the agreements also allow some flexibility and discretion to counterparties in choosing different types of collateral, since their respective availability cannot be anticipated. As a consequence, the party receiving collateral cannot anticipate exactly what risks it will take. Even if one were to impose very tight constraints regarding the type of collateral to be used, the degree of control would not be perfect, since one cannot anticipate to what extent exposures will be created.