ISLA ‘unconvinced’ that haircut levels a ‘material contributor’ to the financial crisis
16 April 2018 London
Image: Shutterstock
The International Securities Lending Association (ISLA) said it was “unconvinced that haircut levels were a material contributor to the financial crisis”, in response to the European Commission’s communication on the finalisation of Basel III.
A key element of the Basel III finalisation are proposals relating to minimum haircut floors for non-centrally cleared financing transactions, which will limit the pro-cyclicality of these transitions and the buildup of excessive leverage in the financial system.
In a letter from ISLA CEO Andrew Dyson in response to the Commission’s communication, ISLA said that it broadly accepts the proposals, but believes the Commission must “clarify the scope of the minimum haircuts given their intended objectives”.
Some members expressed concerns over the complex rules, which may deter some entities, including asset lenders, from participating in securities financing transactions (SFTs), according to ISLA.
“The withdrawal of these important finance and collateral liquidity providers may have a detrimental impact on market efficiency”, ISLA said, “we therefore believe it is important to distinguish between the entity providing the financing or collateral liquidity, and the entity receiving it”.
ISLA also explained that the rules needed to recognise the risk of driving finance activity away from prudentially regulated firms where regulatory scrutiny and supervision is more straightforward.
“The proposals need to be very clearly focused on the provision of financing to non-prudentially regulated firms, provided by firms subject to prudential regulation,” ISLA said.
ISLA added: “ISLA believes that international alignment of these measures will ensure a globally consistent application and reduce the risks of market fragmentation. The Commission has broadly addressed the FSB recommendations for the mitigation of risk associated with SFTs through the adoption of the Securities Finance Transaction Regulation (SFTR).”
It concluded: “ISLA notes that the Commission has previously recognised that the design and application of minimum haircuts requirements should only proceed once SFTR data can be used to calibrate it.”
“Given the sensitivities and potential impacts that the application of minimum haircuts may have on finance availability and collateral liquidity, ISLA strongly agrees with the Commission’s report and believes it would be prudent to utilise the SFTR data to design and calibrate any minimum haircut regime in Europe.”
A key element of the Basel III finalisation are proposals relating to minimum haircut floors for non-centrally cleared financing transactions, which will limit the pro-cyclicality of these transitions and the buildup of excessive leverage in the financial system.
In a letter from ISLA CEO Andrew Dyson in response to the Commission’s communication, ISLA said that it broadly accepts the proposals, but believes the Commission must “clarify the scope of the minimum haircuts given their intended objectives”.
Some members expressed concerns over the complex rules, which may deter some entities, including asset lenders, from participating in securities financing transactions (SFTs), according to ISLA.
“The withdrawal of these important finance and collateral liquidity providers may have a detrimental impact on market efficiency”, ISLA said, “we therefore believe it is important to distinguish between the entity providing the financing or collateral liquidity, and the entity receiving it”.
ISLA also explained that the rules needed to recognise the risk of driving finance activity away from prudentially regulated firms where regulatory scrutiny and supervision is more straightforward.
“The proposals need to be very clearly focused on the provision of financing to non-prudentially regulated firms, provided by firms subject to prudential regulation,” ISLA said.
ISLA added: “ISLA believes that international alignment of these measures will ensure a globally consistent application and reduce the risks of market fragmentation. The Commission has broadly addressed the FSB recommendations for the mitigation of risk associated with SFTs through the adoption of the Securities Finance Transaction Regulation (SFTR).”
It concluded: “ISLA notes that the Commission has previously recognised that the design and application of minimum haircuts requirements should only proceed once SFTR data can be used to calibrate it.”
“Given the sensitivities and potential impacts that the application of minimum haircuts may have on finance availability and collateral liquidity, ISLA strongly agrees with the Commission’s report and believes it would be prudent to utilise the SFTR data to design and calibrate any minimum haircut regime in Europe.”
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