Friday, March 31, 2017

Lack of Haircut Data Hampers E.U. SFT Risk Assessment

Author: David Schwartz J.D. CPA

The European Securities and Markets Authority (ESMA)’s report on Trends, Risks, and Vulnerabilities No. 1, 2017 (TRV) is the body’s latest effort to highlight areas of risk facing European financial markets. Noting that financial markets remained relatively calm since its last quarterly assessment, ESMA said that risks in the markets "remained at high levels, reflecting very high risk in securities markets, and elevated risk for investors, infrastructures, and services.” ESMA’s overall risk assessment remained unchanged with market and credit risks remaining at "the highest level,” while liquidity and contagion risk remained merely “high." The report also identified political and policy uncertainties following Brexit and the U.S. elections as well as potential repercussions from the upcoming elections in some E.U. member states as the main risk drivers for 2017. ESMA also expressed concerns about haircut levels in securities financing transaction (SFT) markets but said that lack of haircut data was a significant impediment to assessing risks in SFT markets.  


The TRV takes stock of the use of haircuts in the multi-trillion-Euro SFT market, with the focus of ESMA’s research on the level and the calculation methodologies of haircuts used in the E.U. by SFT market participants. According to the TRV, “addressing financial stability  risks arising from  the procyclicality of haircuts has become a priority for global regulatory policy, and may have  broader implications for  the  E.U. regulatory framework." However, ESMA found a substantive assessment all but impossible given the limited data available on haircuts and the market practices employed by STF participants in setting haircuts. Looking toward future assessments, they do expect better and more complete haircut data to become available once the reporting obligations under the E.U. Regulation on Transparency of Securities Financing Transactions and Reuse (SFTR) take effect.[1] 


The full text of ESMA’s TRV is available via



[1]  The SFTR, which came into force on January 12, 2016, forms part of the package of E.U. legislation targeted at reforming “shadow banking” and improving the transparency of SFTs, such as repurchase transactions, securities, and commodities lending transactions, buy-sell back transactions and margin lending transactions.


The reporting obligations are subject to a phase-in period, the precise timing of which depends on implementing regulatory technical standards (RTS) which are yet to be published by ESMA, and are not expected to apply to any category of the market participant before the beginning of 2018. The actual start date for transaction reporting will depend on the relevant RTS relating to the reporting requirements. The reporting obligation will apply on a phased-in basis from the date which is 12-, 15-, 18 or 21- months after the date of entry into force of the RTS, in each case, depending on counterparty type.