Policy Framework for Addressing Shadow Banking Risks in Securities Lending and Repos
Based on the initial recommendations to strengthen oversight and regulation of the shadow banking system as set out in its report submitted to the G20 in October 2011, the Financial Stability Board (FSB) set up the Workstream on Securities Lending and Repos (WS5) to assess financial stability risks and develop policy recommendations, where necessary, to strengthen regulation of securities lending and repos.
In November 2012, the FSB published its consultative document A Policy Framework for Addressing Shadow Banking Risks in Securities Lending and Repos which identified the financial stability issues (or shadow banking risks) in securities lending and repo markets, and set out 13 policy recommendations to address such risks. These included: improvements in regulatory reporting and market transparency; regulation of securities financing (e.g. minimum standards for methodologies used by market participants in calculating the "haircuts" (margins) that limit the amount of financing that can be provided against a given security and minimum standards on cash collateral reinvestment), as well as policy recommendations related to structural aspects of the securities financing markets such as central clearing. The FSB also invited views on the possible introduction of a framework of numerical haircut floors for certain securities financing transactions which are intended to limit the extent to which financial entities, including non-banks, can use securities financing transactions to obtain leverage. These measures, if appropriately implemented, would help counteract pro-cyclical fluctuations in securities financing.
Consultation responses were received from more than 50 respondents including trade associations representing both securities borrowers and lenders, intermediaries in the securities lending and repo markets, asset managers, market infrastructure providers and public authorities. In general, the respondents agreed with the analysis of FSB but cautioned against possible negative impacts and unintended consequences on repo and securities lending markets that function as the core funding market for financial institutions and promote price discovery for other related markets.