FSB issues final sec lending recommendations
13 January 2017 Basel
Image: Shutterstock
The Financial Stability Board (FSB) has issued new recommendations for securities lending as part of its review of risks threatening asset managers.
The board’s report included 14 policy recommendations to tackle “financial stability risk activities”, like securities lending, pose to the market.
Specifically, the FSB has taken umbrage with asset managers’ use of indemnification of the underlying lender’s trades.
As part of its final recommendations, the FSB suggested that authorities should monitor indemnifications provided by agent lenders/asset managers to clients in relation to their securities lending activities.”
“Where these monitoring efforts detect the development of material risks or regulatory arbitrage that may adversely affect financial stability, authorities should verify and confirm asset managers adequately cover potential credit losses from the indemnification provided to their clients.”
It added: “The enhanced disclosure task force improve public disclosure for financial institutions on any indemnifications provided as agent to securities lending clients, including a maturity profile of those contingent liabilities where appropriate.”
“However, such a recommendation does not exist for other types of financial institutions offering securities lending indemnities.”
Previous versions of the FSB’s securities lending recommendations attracted criticism from major industry players, such as BlackRock, which stated in 2015 that the board “misunderstood the lending practice”.
BlackRock confirmed at the time that it has never had its indemnification agreements triggered or had to use its own capital to repurchase a security on a lending client’s behalf and, as a result, held $2 billion in unencumbered liquidity against potential indemnification exposure, with access to an additional $6 billion of liquidity.
Commenting on the final recommendations, Mark Carney, chair of the FSB, stated: “The growth in asset management activities provides new sources of credit and investment, and adds diversity to our financial system. The policy recommendations published today will enhance the resilience of asset management activities so that this form of market-based finance can help underpin strong, sustainable and balanced economic growth. This will be of lasting benefit to our collective economies.”
Daniel Tarullo, chair of the FSB standing committee on supervisory and regulatory cooperation, added: “The policy recommendations will better prepare asset managers and funds for future stress events. The recommendations should also significantly enhance the information available to authorities for understanding potential risks from the asset management sector within and across jurisdictions.”
The board’s report included 14 policy recommendations to tackle “financial stability risk activities”, like securities lending, pose to the market.
Specifically, the FSB has taken umbrage with asset managers’ use of indemnification of the underlying lender’s trades.
As part of its final recommendations, the FSB suggested that authorities should monitor indemnifications provided by agent lenders/asset managers to clients in relation to their securities lending activities.”
“Where these monitoring efforts detect the development of material risks or regulatory arbitrage that may adversely affect financial stability, authorities should verify and confirm asset managers adequately cover potential credit losses from the indemnification provided to their clients.”
It added: “The enhanced disclosure task force improve public disclosure for financial institutions on any indemnifications provided as agent to securities lending clients, including a maturity profile of those contingent liabilities where appropriate.”
“However, such a recommendation does not exist for other types of financial institutions offering securities lending indemnities.”
Previous versions of the FSB’s securities lending recommendations attracted criticism from major industry players, such as BlackRock, which stated in 2015 that the board “misunderstood the lending practice”.
BlackRock confirmed at the time that it has never had its indemnification agreements triggered or had to use its own capital to repurchase a security on a lending client’s behalf and, as a result, held $2 billion in unencumbered liquidity against potential indemnification exposure, with access to an additional $6 billion of liquidity.
Commenting on the final recommendations, Mark Carney, chair of the FSB, stated: “The growth in asset management activities provides new sources of credit and investment, and adds diversity to our financial system. The policy recommendations published today will enhance the resilience of asset management activities so that this form of market-based finance can help underpin strong, sustainable and balanced economic growth. This will be of lasting benefit to our collective economies.”
Daniel Tarullo, chair of the FSB standing committee on supervisory and regulatory cooperation, added: “The policy recommendations will better prepare asset managers and funds for future stress events. The recommendations should also significantly enhance the information available to authorities for understanding potential risks from the asset management sector within and across jurisdictions.”
NO FEE, NO RISK
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
