Friday, January 31, 2014
On January 29, 2014, the European Commission issued its long awaited proposal for the establishment of a central database for Secured Financing Transactions. This release is a part of a larger regulatory effort aimed at increasing the transparency of certain transactions in the shadow banking sector and to prevent regulatory arbitrage. The proposal aims to increase transparency in secured financing transactions, a term which is defined broadly to include repo, reverse repo, tri-party repo, securities lending transactions as well as total return swaps, collateral swaps and buy-sell transactions.
According to the release, the proposal aims to improve the transparency of securities financing transactions (SFTs) – mainly in the following three ways:
There is some question about how well grounded in reality the Commission's fears about regulatory arbitrage really are. Also, the Commissions concerns about rehypothication may be misplaced as well. While it is indeed important to control excess leverage and pro-cyclicality of secured financing transactions, the rehypothication of securities that is part and parcel of the vast majority of such transactions is entirely necessary to make them useful. Because the borrowing of specific securities is nearly always done to meet a requirement to deliver the security, on lending is by definition a requirement of the transaction. This aspect of secured financing transactions is well understood, and efforts to curb on lending could effectively destroy the very transactions the proposed restrictions are trying to regulate.