Post-crisis regulation could be 'detrimental' for repo and sec lending
17 December 2018 New York
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Post-crisis regulation requires further evaluation as it could be detrimental for repo and securities lending markets, according to a Global Financial Markets Association (GFMA) and International Capital Market Association (ICMA) report.
The report explained that regulation is a key driver of change for the way the repo and broader securities finance transactions (SFT) markets operate today and how they will evolve in the near future.
It found that regulatory reforms have had a profound effect on banks’ SFT businesses with a significant increase in capital requirements.
While the markets have so far proved to be resilient, the report suggested that they are still some way from reaching a new normality, with regional markets at different stages of that evolution reflecting divergent implementation of regulatory reforms on different timelines.
Further findings from the report showed that securities lenders may have to accept significantly lower returns for their portfolios due to lower demands.
Meanwhile, short sellers may need to seek alternative ways to short securities and improve the price discovery process.
Additionally, the report found that increased costs and reduced capacity for transacting with regulated counterparties could ultimately lead to increased costs for investors in pension funds and mutual funds.
The report recommends that the Financial Stability Board (FSB) and Basel Committee on Banking Standards should review the coherence and calibration of the post-crisis regulatory framework, particularly pertaining to how it impacts the repo market.
The treatment of repo transactions backed by the highest quality government bonds should be reviewed in order to ensure that the private sector market has the capacity to absorb quantitative easing unwind and to operate without significant reliance on central banks during normal and stressed market conditions.
Kenneth Bentsen, CEO of GFMA, said: “Repos and other SFTs play a critical role in the global financial system and support the real economy in many different ways. Therefore, it is essential that the SFT markets function smoothly during both normal and stressed times.”
“Our report’s findings suggest the need for several policy revisions and that further work needs to be conducted in recalibrating the global prudential standards, without sacrificing safety and soundness, to ensure better functioning of the repo and broader SFT markets for the benefit of the wider global economy.”
Godfried De Vidts, chair of the ICMA European Repo and Collateral Council, commented: “It is clear that regulation is a key driver of changes in the way the repo and broader SFT markets operate today and how they will evolve in the near future. While the markets have thus far proved resilient, they are still some way from reaching a new normality, with regional markets at different stages of that evolution reflecting divergent implementation of regulatory reforms on different timelines, and the impact of future regulatory reforms remains a key concern.”
De Vidts added: “Hence it is important to conduct a review of the coherence and calibration of the post-crisis regulatory framework, particularly pertaining to how it impacts the repo market, and to ensure that any proposed further reforms are subjected to robust impact analysis.”
The report explained that regulation is a key driver of change for the way the repo and broader securities finance transactions (SFT) markets operate today and how they will evolve in the near future.
It found that regulatory reforms have had a profound effect on banks’ SFT businesses with a significant increase in capital requirements.
While the markets have so far proved to be resilient, the report suggested that they are still some way from reaching a new normality, with regional markets at different stages of that evolution reflecting divergent implementation of regulatory reforms on different timelines.
Further findings from the report showed that securities lenders may have to accept significantly lower returns for their portfolios due to lower demands.
Meanwhile, short sellers may need to seek alternative ways to short securities and improve the price discovery process.
Additionally, the report found that increased costs and reduced capacity for transacting with regulated counterparties could ultimately lead to increased costs for investors in pension funds and mutual funds.
The report recommends that the Financial Stability Board (FSB) and Basel Committee on Banking Standards should review the coherence and calibration of the post-crisis regulatory framework, particularly pertaining to how it impacts the repo market.
The treatment of repo transactions backed by the highest quality government bonds should be reviewed in order to ensure that the private sector market has the capacity to absorb quantitative easing unwind and to operate without significant reliance on central banks during normal and stressed market conditions.
Kenneth Bentsen, CEO of GFMA, said: “Repos and other SFTs play a critical role in the global financial system and support the real economy in many different ways. Therefore, it is essential that the SFT markets function smoothly during both normal and stressed times.”
“Our report’s findings suggest the need for several policy revisions and that further work needs to be conducted in recalibrating the global prudential standards, without sacrificing safety and soundness, to ensure better functioning of the repo and broader SFT markets for the benefit of the wider global economy.”
Godfried De Vidts, chair of the ICMA European Repo and Collateral Council, commented: “It is clear that regulation is a key driver of changes in the way the repo and broader SFT markets operate today and how they will evolve in the near future. While the markets have thus far proved resilient, they are still some way from reaching a new normality, with regional markets at different stages of that evolution reflecting divergent implementation of regulatory reforms on different timelines, and the impact of future regulatory reforms remains a key concern.”
De Vidts added: “Hence it is important to conduct a review of the coherence and calibration of the post-crisis regulatory framework, particularly pertaining to how it impacts the repo market, and to ensure that any proposed further reforms are subjected to robust impact analysis.”
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