The chair of the Financial Stability Boards (FSB) shadow banking work stream on securities lending and repo, David Rule, has revealed the potential policy options that his team is looking at. Rules statements come ahead of the end of year deadline for when the FSB must submit concrete recommendations on the area.
First, the work stream is working on a set of policy options around transparency. Regulators can gather market data by employing a range of techniques, including industry surveys, regulatory reporting and trade repositories.
But, as well as focussing on what the best way of getting this data is, Rule said that there needs to be clarity on why authorities want to collect the data and what segments of the market they are targeting.
According to an April 27 interim report published by Rules FSB work stream, securities financing and repo markets are not a single area. Rather, there are different segments to these markets.
The report divides the securities financing markets into four main, inter-linked segments: a securities lending segment; a leveraged investment fund financing and securities borrowing segment; an inter-dealer repo segment; and a repo financing segment.
Speaking at the ECs shadow banking conference in Brussels on Friday, Rule said that policy solutions are likely to apply differently in the different segments.
Client reporting is another aspect of transparency. This was inadequate in many ways before the crisis, said Rule. There have been improvements, but theres still a question.
Next, the FSB Chair turned his attention to financial reporting.
In general, financial reporting shows where banks or others used securities to borrow cash, but there is much less transparency around a collateral swap, said Rule.
Richard Comotto, visiting fellow at the International Capital Market Association centre, suggested that it is possible to have so much information that it becomes impossible to see the woods for the trees.
It needs to be very carefully considered what information is going to be gathered, said Comotto, speaking on the same panel as Rule.
The FSB work stream will also consider structural options, including whether such transactions should go through central counterparties. Although this is more commonplace in the inter-dealer repo market, Rule said theres more of an open question concerning the dealer and client markets.
The FSB head then addressed the regulatory options, which made up the third set of policy options. Focussing on minimum haircuts, Rule again called for clarity on the authorities motivations for introducing them.
Speaking earlier at the same conference, Paul Tucker, deputy governor of the Bank of England, discussed whether these are being used as counter-cyclical reserve powers, used only when particular market segments are overheating, or used to create more of a level playing field between banks and non-banks. This is because, unlike non-bank entities, banks are subject to capital and liquidity regulation.
The role of haircuts in amplifying cyclicality has attracted particular attention. The concern is that in an up-cycle, bouyant assets prices and subdued risk perceptions, reflected in narrow haircuts, fuel borrowing. This moves asset prices further than those risk perceptions reduce haircuts and so a cycle starts that leads to excess leverage.
In the down-cycle the concern is that the reverse applies.
Rule also called for common minimum standards around cash collateral reinvestment by securities lenders.
Concluding the discussion of policy options that are on the table, Rule addressed collateral reuse.
I think we need to be clear about why we want to regulate, he said. Is it for client protection reasons, or is it financial stability reasons.