Published On: Tue, Oct 14th, 2014

FSB Regulatory framework for haircuts on non-centrally cleared securities financing transactions

Mark Carney, Governor of the Bank of England

Mark Carney, Governor of the Bank of England

Based on the initial recommendations to strengthen oversight and regulation of the shadow banking system as set out in its report submitted to the G20 in October 2011, the Financial Stability Board (FSB) set up the Workstream on Securities Lending and Repos (WS5) to assess financial stability risks and develop policy recommendations, where necessary, to strengthen regulation of securities lending and repos.

On 29 August 2013, the FSB published the report Policy Framework for Addressing Shadow Banking Risks in Securities Lending and Repos (hereafter August 2013 Report) that set out policy recommendations for addressing financial stability risks in relation to securities lending and repos (hereafter securities financing transactions). These included: standards and processes for data collection and aggregation at the global level to enhance transparency of securities financing markets, which is currently being taken forward by an FSB data expert group that will propose standards and processes by November 2014; minimum standards on cash collateral reinvestment; requirements on re-hypothecation; minimum regulatory standards for collateral valuation and management; and policy recommendations related to structural aspects of the securities financing markets (central clearing and possible changes in the bankruptcy law treatment of securities financing transactions). The FSB also agreed in March 2014 implementation dates for these recommendations as set out in Recommendations 1 to 11 in Annex 1 of this document.

Although most of the policy recommendations had been finalised, the August 2013 Report included consultative proposals on a regulatory framework for haircuts on certain non-centrally cleared securities financing transactions. The FSB invited comments from the public on these proposals by 28 November 2013 and consultation responses were received from more than 20 respondents including trade associations representing securities borrowers and lenders, intermediaries in the securities lending and repo markets, asset managers, market infrastructure providers, public authorities and individuals.

In finalising its regulatory framework for haircuts, the FSB focused on addressing the financial stability issues as described in Section 1 of the August 2013 Report and in the interim report Securities Lending and Repos: Market Overview and Financial Stability Issues published in April 2012. In addition, the FSB has endeavoured to ensure that its recommendations minimise the risk of regulatory arbitrage as well as undue distortion of markets, and are consistent with other international regulatory initiatives. In particular, the FSB launched in April 2013 a two-stage quantitative impact study (QIS) to assess the potential impact and unintended consequences associated with its recommendations on minimum haircut methodology standards and numerical haircut floors. The first stage of this QIS (QIS1) took place in April-June 2013 and consisted of collecting detailed historical

haircut data from a small pool of large financial intermediaries globally so as to calibrate the proposed minimum haircut recommendations. The FSB subsequently conducted the second stage of the QIS (QIS2) in November 2013 – January 2014 to assess the scope and quantitative impact of the consultative proposals on a wider set of market participants including banks and broker-dealers, agent-lenders, and non-bank entities. Annex 2 summarises the results of the QIS2.

The finalised regulatory framework for haircuts on non-centrally cleared securities financing transactions consists of: (i) qualitative standards for methodologies used by market participants that provide securities financing to calculate haircuts on the collateral received (Sections 2); and (ii) a framework of 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 (hereafter “non-banks”) (Section 3).

After consideration of the consultation findings and QIS results, the levels of numerical haircut floors have been raised as shown in Table 1 in Section 3.2. The revised levels have been calibrated based on (i) the QIS1 and QIS2 results, (ii) existing market and central bank haircuts, and (iii) data on historical price volatility of different asset classes (which is summarised in Annex 3). Additionally, another maturity bucket has been introduced for debt securities with a residual maturity of more than ten years.

To ensure shadow banking activities are fully covered, to reduce the risk of regulatory arbitrage, and to maintain a level-playing field, the FSB believes it is essential to expand the scope of its numerical haircut floors to cover securities financing transactions between non-banks or “non-bank-to-non-bank transactions”. In this regard, the FSB is now issuing a consultative proposal on the application of numerical haircut floors to cover non-bank-to-non-bank transactions backed by collateral other than government securities (Annex 4).

Application of the regulatory framework for haircuts may vary in details across jurisdictions, depending on existing regulatory frameworks and approaches adopted by national/regional authorities for implementing the numerical haircut floors. The FSB members are committed to timely implementation of the framework and consistency of outcomes across jurisdictions. Such implementation at the national and regional level will be monitored through the FSB process as set out in Section 3.6.

The FSB welcomes comments on these proposals set out in Annex 4. Comments and responses to questions should be submitted by 15 December 2014 by email to or by post (Secretariat of the Financial Stability Board, c/o Bank for International Settlements, CH-4002, Basel, Switzerland). All comments will be published on the FSB website unless a commenter specifically requests confidential treatment.

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