FSB Prescribes Bitter Medicine for Securities Lending and Repo

Securities lending is a potentially pro-cyclical source of funding, raising the possibility that participants will have to dump securities during times of financial stress. It can lead to unexpected connections among disparate market players, such as insurance companies and hedge funds. As a result, securities lending may contribute to the opacity of the financial system and erode the willingness of participants to take on counterparty risk. In addition, it is a source of contagion, with the distress of one firm ramifying throughout the financial system in unpredictable ways.

In its November 18, 2102 consultation paper, Strengthening the Oversight and Regulation of Shadow Banking, the Financial Stability Board (FSB) takes aim at the complex and rapidly evolving repo and securities lending markets. Despite their acknowledged benefits to the financial markets, aspects of securities lending and repo trouble the FSB, particularly their procyclical nature, their lack of transparency, and the ways they may help to transmit negative market events in one part of the globe to another.

Sunday, January 13, 2013/Author: David Schwartz J.D. CPA/Number of views (8867)/Comments (0)/

Categories: All Change Overview and Rationale Formal Regulatory Remedies

Tags: Repo FSB securities lending