Minimum margin requirement 'a possibility'
10 June 2014 Washington DC
Image: Shutterstock
A “broadly applicable” margin requirement to protect against capital exiting short-term funding markets in the event of a financial crisis would make sense, a US Federal Reserve governor has reportedly said.
Federal Reserve governor Daniel Tarullo, delivering a speech at the Association of American Law Schools Mid-year Meeting in Washington DC on 9 June, discussed corporate governance and financial regulation.
A question from an audience member that focused on short-term funding activities such as securities lending and repo prompted Tarullo to say that “it’s a little hard, I think, to make a compelling case against doing something like” introducing a “broadly applicable” minimum margin requirement, according to reports.
Tarullo reportedly added that he does not think such a move, to protect against the mass exodus of capital from short-term funding markets during a financial crisis, would be controversial, given that indemnification and haircuts on collateral are common practice, or “just good counterparty practice”, as the governor reportedly put it.
The Federal Reserve gave no sign as to when a margin requirement could be introduced, but new rules are already in place to force financial institutions to hold more capital to cover risks across the markets in which they operate.
One example is a rule, which becomes effective on 1 January 2018, that applies to US top-tier bank holding companies (BHCs) with more than $700 billion in consolidated total assets or more than $10 trillion in assets under custody and their insured depository institution (IDI) subsidiaries.
Covered BHCs must maintain a leverage buffer greater than 2 percentage points above the minimum supplementary leverage ratio requirement of 3 percent, for a total of more than 5 percent, to avoid restrictions on capital distributions and discretionary bonus payments.
IDI subsidiaries of covered BHCs must maintain at least a 6 percent supplementary leverage ratio to be considered ‘well capitalised’.
Federal Reserve governor Daniel Tarullo, delivering a speech at the Association of American Law Schools Mid-year Meeting in Washington DC on 9 June, discussed corporate governance and financial regulation.
A question from an audience member that focused on short-term funding activities such as securities lending and repo prompted Tarullo to say that “it’s a little hard, I think, to make a compelling case against doing something like” introducing a “broadly applicable” minimum margin requirement, according to reports.
Tarullo reportedly added that he does not think such a move, to protect against the mass exodus of capital from short-term funding markets during a financial crisis, would be controversial, given that indemnification and haircuts on collateral are common practice, or “just good counterparty practice”, as the governor reportedly put it.
The Federal Reserve gave no sign as to when a margin requirement could be introduced, but new rules are already in place to force financial institutions to hold more capital to cover risks across the markets in which they operate.
One example is a rule, which becomes effective on 1 January 2018, that applies to US top-tier bank holding companies (BHCs) with more than $700 billion in consolidated total assets or more than $10 trillion in assets under custody and their insured depository institution (IDI) subsidiaries.
Covered BHCs must maintain a leverage buffer greater than 2 percentage points above the minimum supplementary leverage ratio requirement of 3 percent, for a total of more than 5 percent, to avoid restrictions on capital distributions and discretionary bonus payments.
IDI subsidiaries of covered BHCs must maintain at least a 6 percent supplementary leverage ratio to be considered ‘well capitalised’.
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