ESMA’s final MMF report reveals parting on haircuts
17 November 2017 Paris
Image: Shutterstock
The European Securities and Markets Authority’s (ESMA) industry consultation on money market funds (MMFs) has divided opinion on the best application of haircut rules.
The divide in industry opinion was revealed as part of ESMA’s market research into specifying liquidity and credit quality requirements, applicable to assets received as part of a reverse repurchase agreement involving MMFs.
Of the 18 respondents to ESMA’s study, five aligned themselves with ESMA in calling for standardisation of haircut rules for MMFs engaging in reverse repo trades, while six others emphasised the need for flexibility.
In its final report, ESMA outlined its argument for standardisation as offering more legal certainty while preventing influence by other counterparties, and suggested that it would be easier to impose haircuts, while guaranteeing that lower levels of collateralisation cannot be negotiated.
Standard rules “would stop practises that in the end result in lower industry standards”.
“Furthermore, eligible assets are easier to classify with the Basel table and MMFs would be aligned with market practices.”
Three of the five respondents said they saw no benefit from flexible haircuts.
However, the six advocating flexibility argued that this should be allowed so as to enable managers to do their internal assessment and analysis of market conditions to identify the adequate level of haircuts for that specific circumstance.
Respondents cited market conditions and credit quality of the counterparty and collateral as the main drivers for the determination of the haircut.
Moreover, standardised haircuts could lead to having levels of risk not appropriately reflected, while a flexible approach reduces the risk of losses.
Furthermore, according to the six, having standardised haircuts can potentially reduce the competitiveness of MMFs, compared to other repo users.
One respondent in favour of flexibility went as far as to say that the references to the banking sector should all be deleted, while another respondent stated that the proposed standardised haircuts do not sufficiently consider that only high-quality government securities that have received a favourable assessment will be accepted.
Another respondent highlighted that the proposed haircuts include ineligible asset classes not allowed under the MMF regulation.
Two respondents mentioned that the European Systemic Risk Board (ESRB) opinion on securities financing transactions considers the Financial Stability Board’s approach to haircuts reasonable.
ESRB has proposed that government securities should not be subject to standardised haircuts, and haircuts should be frequently monitored, assessed and adjusted.
The divide in industry opinion was revealed as part of ESMA’s market research into specifying liquidity and credit quality requirements, applicable to assets received as part of a reverse repurchase agreement involving MMFs.
Of the 18 respondents to ESMA’s study, five aligned themselves with ESMA in calling for standardisation of haircut rules for MMFs engaging in reverse repo trades, while six others emphasised the need for flexibility.
In its final report, ESMA outlined its argument for standardisation as offering more legal certainty while preventing influence by other counterparties, and suggested that it would be easier to impose haircuts, while guaranteeing that lower levels of collateralisation cannot be negotiated.
Standard rules “would stop practises that in the end result in lower industry standards”.
“Furthermore, eligible assets are easier to classify with the Basel table and MMFs would be aligned with market practices.”
Three of the five respondents said they saw no benefit from flexible haircuts.
However, the six advocating flexibility argued that this should be allowed so as to enable managers to do their internal assessment and analysis of market conditions to identify the adequate level of haircuts for that specific circumstance.
Respondents cited market conditions and credit quality of the counterparty and collateral as the main drivers for the determination of the haircut.
Moreover, standardised haircuts could lead to having levels of risk not appropriately reflected, while a flexible approach reduces the risk of losses.
Furthermore, according to the six, having standardised haircuts can potentially reduce the competitiveness of MMFs, compared to other repo users.
One respondent in favour of flexibility went as far as to say that the references to the banking sector should all be deleted, while another respondent stated that the proposed standardised haircuts do not sufficiently consider that only high-quality government securities that have received a favourable assessment will be accepted.
Another respondent highlighted that the proposed haircuts include ineligible asset classes not allowed under the MMF regulation.
Two respondents mentioned that the European Systemic Risk Board (ESRB) opinion on securities financing transactions considers the Financial Stability Board’s approach to haircuts reasonable.
ESRB has proposed that government securities should not be subject to standardised haircuts, and haircuts should be frequently monitored, assessed and adjusted.
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