FSB sets out haircut plans
15 October 2014 Basel
Image: Shutterstock
The Financial Stability Board (FSB) has delivered its shadow banking framework for haircuts on non-centrally cleared securities financing transactions, with numerical haircut floors set higher than previously proposed.
Under the framework, which was published on 13 October following public consultations and qualitative impact studies, corporate bonds with a maturity of between one and five years will require a 1.5 percent haircut, up from 1 percent.
Equities will need a 6 percent haircut, up from 4 percent. Other assets within the scope of the framework will require haircuts of 10 percent. The FSB will apply these rules to securities-against-cash transactions.
Where shares in mutual funds are used as collateral for securities financing transactions, they will be subject to the 10 percent “other asset” haircut.
The FSB said the haircut floors have been set higher than previously proposed due to qualitative impact study results, existing market and central bank haircuts, and data on historical price volatility of different asset classes.
The board, which represents the G20 member countries, also introduced an additional maturity bucket for debt securities with a residual maturity of more than 10 years, and in a significant step, will apply the haircut floors to non-bank-to-non-bank transactions.
“[This will] ensure shadow banking activities are fully covered … reduce the risk of regulatory arbitrage, and … maintain a level-playing field,” explained the FSB.
Bank of England head Mark Carney, who is also chairman of the FSB, said the framework addresses “important sources of leverage and the level of risk-taking in the core funding markets”, and that it “marks a big step forward” in the board’s efforts to “transform shadow banking into resilient market-based financing conducted on a sound basis”.
The US Federal Reserve’s Daniel Tarullo added: “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.”
The FSB said it will complete its work on the application of numerical haircut floors to non-bank-to-non-bank transactions and set out details of how it will monitor implementation by Q2 2015.
FSB member authorities will implement the framework, including the numerical haircut floors, by the end of 2017.
Under the framework, which was published on 13 October following public consultations and qualitative impact studies, corporate bonds with a maturity of between one and five years will require a 1.5 percent haircut, up from 1 percent.
Equities will need a 6 percent haircut, up from 4 percent. Other assets within the scope of the framework will require haircuts of 10 percent. The FSB will apply these rules to securities-against-cash transactions.
Where shares in mutual funds are used as collateral for securities financing transactions, they will be subject to the 10 percent “other asset” haircut.
The FSB said the haircut floors have been set higher than previously proposed due to qualitative impact study results, existing market and central bank haircuts, and data on historical price volatility of different asset classes.
The board, which represents the G20 member countries, also introduced an additional maturity bucket for debt securities with a residual maturity of more than 10 years, and in a significant step, will apply the haircut floors to non-bank-to-non-bank transactions.
“[This will] ensure shadow banking activities are fully covered … reduce the risk of regulatory arbitrage, and … maintain a level-playing field,” explained the FSB.
Bank of England head Mark Carney, who is also chairman of the FSB, said the framework addresses “important sources of leverage and the level of risk-taking in the core funding markets”, and that it “marks a big step forward” in the board’s efforts to “transform shadow banking into resilient market-based financing conducted on a sound basis”.
The US Federal Reserve’s Daniel Tarullo added: “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.”
The FSB said it will complete its work on the application of numerical haircut floors to non-bank-to-non-bank transactions and set out details of how it will monitor implementation by Q2 2015.
FSB member authorities will implement the framework, including the numerical haircut floors, by the end of 2017.
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