SIFMA calls for regulatory impact assessment
09 December 2016 Washington DC
Image: Shutterstock
The managing director of the Securities Industry and Financial Markets Association (SIFMA) has urged the US House of Representatives to assess the cumulative impact of regulation on short-term financing, identifying “potential, but not exhaustive, areas of concern”.
In his testimony to the House Committee on Financial Services Subcommittee on Capital Markets, Robert Toomey noted that the rules on client trades, designed to reduce risk, are inconsistent with the objectives of other capital and prudential regulations.
“We find duplications and inconsistencies between the rules that together could have negative effects,” Toomey said.
“The treatment of low-risk, high-quality assets like cash and cash equivalents varies depending on the rule and often does not reflect their low-risk or risk free status.”
He argued that repo activity allows the US capital markets to remain the most efficient and liquid in the world, and helps decrease the overall cost of borrowing, while also providing a mechanism for the efficient management of short-term cash and collateral requirements
He recommended an assessment of the coherence and cumulative impacts “to identify cases where there may be unnecessary duplication or conflicts between specific regulatory requirements and broader policy goals”.
Specifically, Toomey focused on the supplementary leverage ratio (SLR), liquidity coverage ratio (LCR), net stable funding ratio (NSFR) and the Volker Rule.
With regards to SLR, Toomey suggested that the regulation has implications for the smooth functioning of the short-term funding markets, particularly for the repo market for US securities.
The requirements have “sharply increased the cost for use of a bank’s balance sheet in a traditional matched book repo arrangement”, he said.
“Safe treasuries and cash are subject to the same capital treatment as less safe assets. As a result, intermediaries in the repo market for treasuries—generally a margin business—would have to require profits for treasury repo that would be comparable to transactions in riskier assets.”
“Dealers associated with banks subject to the SLR thus have hard balance sheet constraints that may limit the ability to intermediate some repo classes.”
LCR has led to additional stress on liquidity in the repo market, with requirements to have high-quality liquid assets (HQLA) on hand in case of a short-term liquidity stress event, which is increasing demand for HQLA, and therefor adding to liquidity pressures.
Toomey suggested that under the proposed NSFR regime repos and reverse repos would be subject to “asymmetric treatment”.
Under the current proposal, short-term funding from financial sector entities to subject entity will be subject to 0 percent available stable funding. Short-term lending to financial sector entities on the other hand, will be assigned a required stable funding factor of 10 to 15 percent.
“The proposed rule would require a subject entity to hold stable funding against a repo book that is perfectly matched, effectively imposing yet another tax on these transactions,” Toomey said.
“Elimination of the asymmetrical treatment of the two legs of the matched transactions would alleviate this additional pressure on this low risk activity.”
Finally, Toomey argued that limited proprietary trading under the Volker Rule means more pressure on the cash markets.
He said: “SIFMA has long held the position that the Volcker Rule was a solution in search of a problem and that it did not address issues identified in the financial crisis.”
Firms are continuing to put policies and procedures in place that would recognise the distinction between permitted and prohibited activities, however the complexities in the approach to market making means this is a difficult task.
“A more transparent and cooperative regulatory/interpretive oversight regime would aid firms as they become compliant and limit the doubts that may cause further pull back from needed customer activity,” Toomey said.
An assessment of the cumulative impact of these rules should be carried out “to ensure harm is not being done to this crucial market”.
He concluded: “We believe that given the experience and market data from the introduction of these new approaches, the time is right to provide a wholesale review of the impact and coherence of these requirements with a view towards moving towards a better balance of safety and soundness with efficiency, liquidity and capital availability.”
In his testimony to the House Committee on Financial Services Subcommittee on Capital Markets, Robert Toomey noted that the rules on client trades, designed to reduce risk, are inconsistent with the objectives of other capital and prudential regulations.
“We find duplications and inconsistencies between the rules that together could have negative effects,” Toomey said.
“The treatment of low-risk, high-quality assets like cash and cash equivalents varies depending on the rule and often does not reflect their low-risk or risk free status.”
He argued that repo activity allows the US capital markets to remain the most efficient and liquid in the world, and helps decrease the overall cost of borrowing, while also providing a mechanism for the efficient management of short-term cash and collateral requirements
He recommended an assessment of the coherence and cumulative impacts “to identify cases where there may be unnecessary duplication or conflicts between specific regulatory requirements and broader policy goals”.
Specifically, Toomey focused on the supplementary leverage ratio (SLR), liquidity coverage ratio (LCR), net stable funding ratio (NSFR) and the Volker Rule.
With regards to SLR, Toomey suggested that the regulation has implications for the smooth functioning of the short-term funding markets, particularly for the repo market for US securities.
The requirements have “sharply increased the cost for use of a bank’s balance sheet in a traditional matched book repo arrangement”, he said.
“Safe treasuries and cash are subject to the same capital treatment as less safe assets. As a result, intermediaries in the repo market for treasuries—generally a margin business—would have to require profits for treasury repo that would be comparable to transactions in riskier assets.”
“Dealers associated with banks subject to the SLR thus have hard balance sheet constraints that may limit the ability to intermediate some repo classes.”
LCR has led to additional stress on liquidity in the repo market, with requirements to have high-quality liquid assets (HQLA) on hand in case of a short-term liquidity stress event, which is increasing demand for HQLA, and therefor adding to liquidity pressures.
Toomey suggested that under the proposed NSFR regime repos and reverse repos would be subject to “asymmetric treatment”.
Under the current proposal, short-term funding from financial sector entities to subject entity will be subject to 0 percent available stable funding. Short-term lending to financial sector entities on the other hand, will be assigned a required stable funding factor of 10 to 15 percent.
“The proposed rule would require a subject entity to hold stable funding against a repo book that is perfectly matched, effectively imposing yet another tax on these transactions,” Toomey said.
“Elimination of the asymmetrical treatment of the two legs of the matched transactions would alleviate this additional pressure on this low risk activity.”
Finally, Toomey argued that limited proprietary trading under the Volker Rule means more pressure on the cash markets.
He said: “SIFMA has long held the position that the Volcker Rule was a solution in search of a problem and that it did not address issues identified in the financial crisis.”
Firms are continuing to put policies and procedures in place that would recognise the distinction between permitted and prohibited activities, however the complexities in the approach to market making means this is a difficult task.
“A more transparent and cooperative regulatory/interpretive oversight regime would aid firms as they become compliant and limit the doubts that may cause further pull back from needed customer activity,” Toomey said.
An assessment of the cumulative impact of these rules should be carried out “to ensure harm is not being done to this crucial market”.
He concluded: “We believe that given the experience and market data from the introduction of these new approaches, the time is right to provide a wholesale review of the impact and coherence of these requirements with a view towards moving towards a better balance of safety and soundness with efficiency, liquidity and capital availability.”
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