Abstract
Financial institutions can build up leverage via the use of derivatives and securities financing transactions (SFTs). In order to limit the build-up of excessive leverage and the associated liquidity risks, as well as the procyclical effects of margin and haircut-setting practices, the macroprudential toolkit needs to be extended. This special feature presents the general case for setting macroprudential margins and haircuts using theoretical and empirical evidence on the effectiveness of various design options. Furthermore, it addresses implementation and governance issues that warrant attention when developing a macroprudential framework for margins and haircuts. It concludes by recommending a way forward that is intended to inform the ongoing policy discussions at the European and international levels.
