The chair of the securities lending and repo workstream of
the Financial Stability Board’s
(FSB’s) shadow banking taskforce has laid out the
policy options his team is reviewing, giving a real indication
of what form the proposals will take.
David Rule mapped out the potential policy options at the
ICMA European Repo Council’s (ERC’s)
general meeting, ahead of next month’s meeting
between the G20 finance ministers and central bankers.
interim report on securities lending and repo, published in
April, the FSB described some of the financial stability issues
it had identified. The question now is what exactly the Board
plans to do about these issues.
At the ERC’s general meeting, Rule first
discussed market transparency issues. "The first thing we will
do in our report is to set out what we, as authorities, would
like to know [about repo and securities financing markets]," he
said. "How we then get that information is a practical question
that can be addressed jointly with market participants."
The European Central Bank has notably supported the idea of
trade repository for the repo market. According to Rule,
the FSB will not seek to duplicate that, but will work with
existing initiatives. However, there are difficult issues to
One is whether the FSB works at the transaction-level and
tries to insert reporting into the trade process, or whether it
should make institutions report positions to the authorities on
a periodic basis.
That, said Rule, is a big decision. There are also
practically difficult questions stemming from the fact that the
FSB will want to know the type of collateral.
"Defining what the types of collateral are is a very
important exercise," he said. "And I don’t think
it will be straightforward. One bank was telling me it had a
tree of 160 different collateral types which it reviewed weekly
- and it changed weekly."
Another issue is improvements in corporate disclosures. The
FSB has looked at the accounts of the largest banks and dealers
around the world to see what it can find out about their
activities in the repo and securities lending markets. "We have
found complete lack of consistency and some fairly glaring gaps
in what you would want to know if you were a reader of
corporate accounts," said Rule.
In particular, he said it’s very difficult to
work out what activity financial institutions do in securities
versus securities trades. The disclosures bundle derivatives
collateral, repo collateral, securities borrowing and
"I think what would be helpful to both regulators and risk
analysts is a sources and uses of collateral statement that
breaks down where institutions obtain collateral and what they
do with it, so that may be one of our recommendations," he
The chair of the FSB’s fifth workstream also
discussed reporting by fund managers to end investors.
"We have spent a lot of time thinking about the structure of
these markets," said Rule. This involved considering whether
central clearing played a sufficient role for these
"We haven’t come up with an answer yet, but I
don’t think there will be any radical initiatives
coming out of the FSB in this area," he added.
Rule also discussed the option of having a requirement
underpinning the way market participants use methodology to
calculate haircuts. This could take the form of either a
certain number of years of data that includes a stress period,
or requiring stress testing to be used.
But there are implications in the way that Basel capital
requirements are set for banks. "The alternative - and it may
be a complement rather than an alternative - is for the
regulators to set numerical floors on the haircuts that are
used for the markets," said Rule. "That is being considered
There are a number of issues to setting numerical floors,
including what level and how granular are the type of
transactions. What transaction types are in the scope,
counterparty type and asset type are also key issues.
"Primary policy in this area [asset type] would be to catch
a risky asset whose prices are pro-cyclical because
that’s where the pro-cyclicality of the leverage
comes so that might make a case for excluding sovereign bonds,"
said Rule. "On the other hand, we’ve seen that
sovereign bonds can themselves have cyclical variation in their
Rule stressed that these regulatory initiatives are designed
to address problems that were caused in the boom.
"I’m not sure there’s any great rush
to introduce measures because we’re not currently
in a boom period," he said. "There is a great concern to
consult and to understand consequences of any actions
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