Thursday, October 16, 2014

FSB Proposes New Framework for Haircuts on Non-Centrally Cleared Securities Financing Transactions

Securities financing transactions such as repos are important funding tools for a wide range of market participants, including non-bank financial firms. The implementation of the numerical haircut floors on securities financing transactions will reduce the build-up of excessive leverage and liquidity risk by non-banks during peaks in the credit and economic cycle. It will be important for the FSB to monitor the impact of the framework following the implementation to help ensure that it achieves these objectives.  

-- Daniel Tarullo, Chairman of the FSB Standing Committee on Supervisory and Regulatory Cooperation

The Financial Stability Board has proposed a new “Regulatory Framework for Haircuts on Non-centrally Cleared Securities Financing Transactions.”  The new framework addresses certain shadow banking risks relating to securities financing transactions by limiting the build-up of excessive leverage outside the banking system and reducing the procyclicality of that leverage.  

The Framework takes into account public comments received on the August 29, 2013 consultative document, as well as the results of a two-stage quantitative impact study.  The revised framework consists of 

  • qualitative standards for methodologies used by market participants that provide securities financing to calculate haircuts on the collateral received, and 

  • numerical haircut floors that will apply to non-centrally cleared securities financing transactions in which financing against collateral other than government securities is provided to entities other than banks and broker-dealers. 

Based on the results of its qualitative impact study, in this revision to the framework, the FSB has raised the levels of numerical haircuts floors.  In addition, the FSB has proposed that these numerical haircut floors be applied not just to bank-to-bank, and bank-to-non-bank transactions, but non-bank-to-non-bank transactions as well.  According to the FSB, doing so will “level the playing field,” sweep in shadow banking activities, and help prevent regulatory arbitrage.  

In addition to the Framework document, the FSB published a background document entitled "Procyclicality of Haircuts: Evidence from the QIS1." This background document examines the procyclicality of haircuts on non-centrally cleared securities financing transactions and their role during the global financial crisis based on the first stage QIS (QIS1) data. 

The consultation period for this proposal ends on December 15, 2014.