RMA plays nice with FSB’s “shadow banking” recommendations
18 January 2013 Switzerland
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The Committee on Securities Lending of the Risk Management Association has responded to the FSB on its proposals to toughen up regulation of “shadow banking”, praising the board’s efforts to understand the sector.
In its continued efforts to strengthen oversight, the Financial Stability Board asked for feedback in November on its thirteen recommendations, including mitigating the spill-over effect between the regular banking system and the shadow banking system, reducing the susceptibility of money market funds (MMFs) to “runs”, and dampening risks and pro-cyclical incentives associated with secured financing contracts such as repos and securities lending that may exacerbate funding strains in times of “runs”.
The committee for the Risk Management Association has replied with a forty page letter on behalf of several of its members, including BNY Mellon, BlackRock, Citigroup, Northern Trust, State Street and others.
Whilst praising the FSB has for its “thorough analysis” of the market, the committee reminded that securities lending is subject to significant regulation in the United States and Europe already with regulations such as Dodd Frank, Basel III, ESMA and UCITs, and suggested that the board integrate its recommendations with these, rather than: “recommend changes that would impose additional burdens on agency securities lending activities.”
Looking at systemic risk, the committee suggested that it 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.
On the topics of both corporate disclosure requirements and reporting by fund managers to end-investors, the committee were even less keen, pointing out that enhanced disclosure should not require disclosure of information that would not be considered sufficiently “material” to be disclosed under current standards; that it may in fact be harmful or create market confusion; and that if taken up, it should be subject to cost-benefit analysis.
However, the committee supported the FSB’s recommendation that there be a carve-out for cash collateralised transactions that are demand-driven, but noted that it would be inappropriate to require minimum haircuts for agency securities lending and reverse repo transactions, “regardless of whether they are collateralised 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.”
The committee concluded by stating that they looked forward to further dialogue with the FSB, stating: “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.”
In its continued efforts to strengthen oversight, the Financial Stability Board asked for feedback in November on its thirteen recommendations, including mitigating the spill-over effect between the regular banking system and the shadow banking system, reducing the susceptibility of money market funds (MMFs) to “runs”, and dampening risks and pro-cyclical incentives associated with secured financing contracts such as repos and securities lending that may exacerbate funding strains in times of “runs”.
The committee for the Risk Management Association has replied with a forty page letter on behalf of several of its members, including BNY Mellon, BlackRock, Citigroup, Northern Trust, State Street and others.
Whilst praising the FSB has for its “thorough analysis” of the market, the committee reminded that securities lending is subject to significant regulation in the United States and Europe already with regulations such as Dodd Frank, Basel III, ESMA and UCITs, and suggested that the board integrate its recommendations with these, rather than: “recommend changes that would impose additional burdens on agency securities lending activities.”
Looking at systemic risk, the committee suggested that it 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.
On the topics of both corporate disclosure requirements and reporting by fund managers to end-investors, the committee were even less keen, pointing out that enhanced disclosure should not require disclosure of information that would not be considered sufficiently “material” to be disclosed under current standards; that it may in fact be harmful or create market confusion; and that if taken up, it should be subject to cost-benefit analysis.
However, the committee supported the FSB’s recommendation that there be a carve-out for cash collateralised transactions that are demand-driven, but noted that it would be inappropriate to require minimum haircuts for agency securities lending and reverse repo transactions, “regardless of whether they are collateralised 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.”
The committee concluded by stating that they looked forward to further dialogue with the FSB, stating: “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.”
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