The Risk Management Association's Committee on Securities Lending has filed a 40-page response
to the Financial Stability Board's recent whitepaper on shadow banking, focusing on its recommendations regarding securities lending and repo. The January 14, 2013 comment letter represents the views of the RMA and major participants in the agency securities lending markets like BNY Mellon, BlackRock, Citigroup, Northern Trust, State Street, and others. Though applauding the FSB's thorough and thoughtful analysis of the topic, the RMA's comment letter reminds the FSB that securities lending is already a highly regulated industry in the U.S. and Europe, and urges coordination with existing and developing reform efforts.
The letter stresses that securities lending has historically been a low risk industry, and has become even more so over the past few years. RMA feels that adding more layers of regulation to an already low risk industry might be redundant and costly overkill. As a result, they suggest that the FSB be mindful of the sheer number of new and existing regulations that are imposed on the securities lending industry, and work to integrate its recommendations with these, rather than recommend changes that would impose additional burdens on agency securities lending activities.
As we discuss in this letter, agency securities lending practices have generally become even more conservative since the 2008 financial crisis. The overall quality of securities on loan has increased, and the average duration of loans has decreased. Importantly, since the financial crisis, RMA members have commonly observed lenders increasingly viewing securities lending activities as an investment function, rather than as a standalone operational function. As a result, the common practice among lenders is to utilize their investment and risk management functions to assess the risks inherent in even the most conservative securities lending strategies as part of an analysis of their overall risk profile.
At a minimum, RMA suggests that the FSB and other authorities refrain from recommending the imposition of additional material burdens on agency securities lending activities that are not integrated with the various regulatory reforms already underway (e.g., Dodd Frank, Basel III, ESMA and UCITs).
Though RMA supports the FSB’s recommendation that there be a carve-out for demand-driven cash collateralized transactions, they said that they felt it would be inappropriate to require minimum haircuts for agency securities lending and reverse repo transactions, “regardless of whether they are collateralized by cash."
Therefore, the RMA urges the FSB to expand the carve-out to also include any demand-driven securities lending or reverse repo transaction collateralised by liquid assets.
Reporting and Transparency
RMA believes that securities lending is already quite transparent, and worries that moving to a transaction level of reporting may be both costly and less effective overall at monitoring systematic risk.
As noted above, we believe the FSB should remain cognizant of the substantial amount of transparency that already exists in the securities lending market. If regulators conclude that an enhanced reporting regime is required, we believe that the underlying objective of such a regime, namely, whether and to what extent securities lending activities contribute to systemic risk, would be better achieved through position- (or exposure-) based reporting directly to regulators on a periodic basis, rather than via transaction reporting to a TR.
The letter further describes how existing voluntary disclosure practices could be leveraged to greater effect.
Market participants already provide exposure data to third-party vendors as part of their normal-course activities, and these vendor relationships could be leveraged to create an exposure reporting system without the need to build a separate transaction reporting system. Indeed, the existence of these reporting systems evidences the potential usefulness of exposure data to market participants.
Corporate Disclosures and Fund Manager Reporting
The RMA was less enthusiastic about the FSB's recommendations for enhanced corporate disclosure requirements and reporting by fund managers to end-user investors. With regard to corporate disclosures, the FSB suggested specific disclosure items that could be part of such an enhanced disclosure regime, including counterparty concentration, maturity breakdown of trades and information on collateral margins. Once again, the RMA points out that these kinds of disclosures are already required by various authorities under their reporting standards, and urges the FSB to coordinate any recommendations with existing or developing disclosure reforms.
[E]xtensive rules . . . already govern this area from the Financial Accounting Standards Board (“FASB”) for U.S. companies and the International Accounting Standards Board and International Financial Accounting Standards for global companies. In this regard, we understand that FASB intends to update the standards governing disclosure of securities lending transactions by publicly traded companies. In addition, the Basel III capital framework and ESMA Guidelines contemplate enhanced disclosures relating to securities lending and other activities. We strongly believe that any consideration of additional corporate disclosures for securities lending transactions take these deliberations into account and, if appropriate, defer to applicable financial accounting standard setting bodies as well as national regulatory authorities with responsibility for determining requisite corporate disclosures to stakeholders, such as the U.S. Department of Labor with respect to Employee Retirement Income Security Act (“ERISA”) plans, so as to avoid unnecessarily duplicative analysis of the same issues. We also suggest that disclosures be tailored appropriately depending upon their usefulness to relevant stakeholders.
Regarding disclosures by fund managers to end-user investors, RMA argues that these proposed enhancements should not require the disclosure of information that would not be deemed "material" under existing standards. RMA feels that requiring funds to disclose certain kinds of information not presently required may cause them competitive harm and could create market confusion. Again, RMA urges coordination with existing and ongoing reforms.
[T]he SEC intends to issue enhanced disclosure requirements for U.S.-based securities lenders under Section 984(b) of the Dodd-Frank Act, and, as noted, ESMA has issued enhanced disclosure requirements for UCITS funds that engage in securities lending. The latter proposal in particular contemplates disclosures that are more tapered than those suggested by the FSB. These changes, along with similar initiatives, will undoubtedly improve authorities’ and investors’ understanding of funds’ securities lending activities. The FSB and other authorities should refrain from imposing new reporting requirements on fund managers until they have analyzed and internalized the information being reported pursuant to these ongoing reforms.
RMA concluded by urging continued dialogue with the industry and meaningful coordination amongst regulators and policy makers globally.
We look forward to additional dialogue with the FSB and other authorities, and believe, as the FSB does, that healthy and robust collaboration between market participants and regulators is and continues to be an essential prerequisite for achieving effective and efficient reform. As the FSB considers our comments, and those of other market participants, we reiterate our view that the development of effective recommendations requires thorough consideration of the interactions between recommended changes and the existing regulatory framework, including pending changes still in the process of implementation. We submit that only through such a holistic approach can the FSB to make recommendations that will enhance the overall stability of our financial system, while still preserving the important economic and liquidity benefits that agency securities lending activities provide.