ISLA: consistent regulation key to avoiding disruption
28 April 2016 London
Image: Shutterstock
Consistency in regulators’ definitions and an understanding of assets pools is essential to practical market rules for collateral reuse, according to the International Securities Lending Association (ISLA).
The potential pitfalls were highlighted by ISLA in its response letter to the Financial Stability Board’s (FSB) paper on ‘shadow banking’.
The FSB sought industry comment ahead of its final proposal on ways to reinforce stability within alternative financing, also known as shadow banking.
ISLA’s response, which reflects the view of its approximately 100 members, was largely supportive of the FSB's analysis of the growing shadow banking industry.
In particular, ISLA acknowledged that two of the three options offered by the FSB for monitoring collateral reuse would be viable and allow for a "reasonable approximation" of the collateral reuse market.
ISLA also praised the FSB's focus on the practical issues around implementing systems to track collateral reuse and the potential cost impact in industry participants.
However, the response letter did raise concerns that the FSB’s definition of reuse and re-hypothecation was different to that of the European Securities Markets Authority, as seen in the Securities Financing Transaction Regulation.
ISLA commented: “In order to achieve any level of global data aggregation there needs to be a consistent definition of the applicable elements that represent reuse and re-hypothecation.”
Moreover, ISLA highlighted the limited capabilities of its members to discern between collateral held and a their own assets, stated: “There is no legal or practical distinction between own assets and collateral assets. Both belong to the firm and are likely to be held in a single firm depot.”
“Due to the fungibility of the securities in the account, it is not currently possible to link specific securities to any particular source or transaction.”
Questions were also raised by ISLA’s members regarding the potential accuracy of the ‘reuse reliance rate' and the 'collateral circulation length'.
The potential pitfalls were highlighted by ISLA in its response letter to the Financial Stability Board’s (FSB) paper on ‘shadow banking’.
The FSB sought industry comment ahead of its final proposal on ways to reinforce stability within alternative financing, also known as shadow banking.
ISLA’s response, which reflects the view of its approximately 100 members, was largely supportive of the FSB's analysis of the growing shadow banking industry.
In particular, ISLA acknowledged that two of the three options offered by the FSB for monitoring collateral reuse would be viable and allow for a "reasonable approximation" of the collateral reuse market.
ISLA also praised the FSB's focus on the practical issues around implementing systems to track collateral reuse and the potential cost impact in industry participants.
However, the response letter did raise concerns that the FSB’s definition of reuse and re-hypothecation was different to that of the European Securities Markets Authority, as seen in the Securities Financing Transaction Regulation.
ISLA commented: “In order to achieve any level of global data aggregation there needs to be a consistent definition of the applicable elements that represent reuse and re-hypothecation.”
Moreover, ISLA highlighted the limited capabilities of its members to discern between collateral held and a their own assets, stated: “There is no legal or practical distinction between own assets and collateral assets. Both belong to the firm and are likely to be held in a single firm depot.”
“Due to the fungibility of the securities in the account, it is not currently possible to link specific securities to any particular source or transaction.”
Questions were also raised by ISLA’s members regarding the potential accuracy of the ‘reuse reliance rate' and the 'collateral circulation length'.
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