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The International Capital Market Association (ICMA) European Repo Council (ERC) and the International Securities Lending Association (ISLA) have responded to proposed regulation from the Financial Stability Board (FSB), in a joint letter that warned against the excessive curbing of haircut practices.
The ICMA ERC and ISLA were responding to the FSB's policy framework for addressing shadow banking risks in securities lending and repos.
Their letter began by stating that they were unconvinced that haircut practices in the repo and securities lending markets contributed materially to the financial crisis.
Evidence gathered by bodies such as the Committee on the Global Financial System, they alleged, makes it clear that the withdrawal of funding from some weakened institutions largely took the form of the withdrawal of credit lines and certain types of collateral becoming ineligible.
A mandatory through-the-cycle haircut may therefore do little to prevent pro-cyclicality in another crisis, they said.
The associations stated that they believed that the focus of these rules should be firmly on the financing of non- prudentially regulated entities, by banks and regulated broker-dealers subject to prudential regulation and risk weighted capital charges.
“This approach has the advantage of focusing regulatory scrutiny on the regulated sector, making implementation and supervision more straightforward, but we believe that care is needed to ensure that the rules do not drive financing activity away from regulated firms,” the letter went on to say.
“Whilst the numerical floor proposals are restricted in scope in this way, the recommendation for minimum standards for methodologies applies to all market participants and this may have some serious unintended consequences.”
The full report can be read in full on ISLA's website.
