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Shining a light on the shadows: dealer funding and internalization Accessible Data
Figure 1: Stylized Examples of Dealer Intermediation
The top chart displays an example of internalization. The securities shorted by Client A (in the yellow box) come from Client B’s long positions; similarly, the cash margin of Client A (in the green box) finances Client B’s cash loan—called a margin loan. In the middle chart, Client D’s leveraged long positions are financed by the dealer through a margin loan, which in turn the dealer funds on the repo market—raising cash from a money market fund (MMF) against the pledge of collateral. Finally, in the bottom chart Client C’s short positions are covered by borrowing the securities externally, for instance from a pension fund.
Figure 2: Total Customer Short Positions by Collateral Type
The figure describes the time series evolution of aggregate customer shorts broken down by collateral type. On the horizontal axis there is time in months, and on the vertical axis there is the amount of customer shorts in $ billions. In red we have customer shorts with equity collateral, in blue non-investment grade corporate debt, in green investment grade corporate debt, in purple government debt, and in yellow other assets. The figure shows that most of the customer shorts are in equities. Total customer shorts increased slightly in June 2017, stayed stable for a while, and dropped between September and December 2018.
Note: Legend entries appear in order from bottom to top.
Source: FR 2052A.