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
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
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
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.