BCBS proposes changes to SFT haircuts
27 January 2021 Switzerland
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The Basel Committee on Banking Supervision (BCBS) has published for consultation two technical amendments to the chapter of the framework that sets out the calculation of minimum haircut floors for securities financing transactions (SFTs).
According to the BCBS, the technical amendments to chapter CRE56 seek to address an interpretative issue relating to collateral upgrade transactions and correct for a misstatement of the formula used to calculate haircut floors for netting sets of STFs.Technical amendments are defined as changes in standards that are not substantial in nature but that cannot be unambiguously resolved based on the current text.
The first amendment relates to CRE56.5 which covers collateral upgrade transactions where the bank lends a higher quality security and receives a lower quality security.
CRE56.5 specifies that banks that lend securities are exempted from the haircut floors on collateral upgrade transactions if they are unable to reuse, or provide representations that they do not and will not re-use the securities received as collateral against the securities lent.
The committee acknowledges that this phrasing is open to misinterpretation as it implies that the bank itself is subject to the restrictions on reuse of the collateral, which would be inconsistent with the treatment of cash collateralised transactions set out in CRE56.4 where it is the bank’s counterparty that is subject to the restrictions.
To avoid misinterpretation, the committee proposes to replace CRE56.5 with the following paragraph: Banks that borrow (or lend) securities are exempted from the haircut floors on collateral upgrade transactions if the recipient of the securities that the bank has delivered as collateral (or lent) is either (i) unable to re-use the securities (for example, because the securities have been provided under a pledge arrangement), or (ii) provides representations to the bank that they do not and will not re-use the securities.
The second proposed amendment focuses on CRE56.10, which sets out the following formula for the calculation of the portfolio haircut floor for a netting set of SFTs.
The footnote to CRE56.10 explains that this formula is intended to be a weighted average floor of the portfolio. More precisely, the formula is intended to be the exposure-weighted average haircut amount for net-lent securities divided by the exposure-weighted average haircut amount for net-received securities.
However, the formula that was developed was oversimplified before publication, BCBS concedes. The committee is therefore offering a replacement with a “corrected formula”.
BCBS has requested that all comments on the proposed technical amendments should be submitted via the BIS website by 31 March.
On 27 March 2020, the group of central bank governors and heads of supervision decided to defer the implementation of the Basel III framework by one year to January 2023.
In addition, the Financial Stability Board (FSB) decided to also extend the implementation dates by one year for its policy recommendations related to minimum haircut standards for non-centrally cleared SFTs.
For bank-to-non-bank transactions, the updated implementation date is January 2023.
For non-bank-to-non-bank transactions, the updated implementation date is January 2025.
According to the BCBS, the technical amendments to chapter CRE56 seek to address an interpretative issue relating to collateral upgrade transactions and correct for a misstatement of the formula used to calculate haircut floors for netting sets of STFs.Technical amendments are defined as changes in standards that are not substantial in nature but that cannot be unambiguously resolved based on the current text.
The first amendment relates to CRE56.5 which covers collateral upgrade transactions where the bank lends a higher quality security and receives a lower quality security.
CRE56.5 specifies that banks that lend securities are exempted from the haircut floors on collateral upgrade transactions if they are unable to reuse, or provide representations that they do not and will not re-use the securities received as collateral against the securities lent.
The committee acknowledges that this phrasing is open to misinterpretation as it implies that the bank itself is subject to the restrictions on reuse of the collateral, which would be inconsistent with the treatment of cash collateralised transactions set out in CRE56.4 where it is the bank’s counterparty that is subject to the restrictions.
To avoid misinterpretation, the committee proposes to replace CRE56.5 with the following paragraph: Banks that borrow (or lend) securities are exempted from the haircut floors on collateral upgrade transactions if the recipient of the securities that the bank has delivered as collateral (or lent) is either (i) unable to re-use the securities (for example, because the securities have been provided under a pledge arrangement), or (ii) provides representations to the bank that they do not and will not re-use the securities.
The second proposed amendment focuses on CRE56.10, which sets out the following formula for the calculation of the portfolio haircut floor for a netting set of SFTs.
The footnote to CRE56.10 explains that this formula is intended to be a weighted average floor of the portfolio. More precisely, the formula is intended to be the exposure-weighted average haircut amount for net-lent securities divided by the exposure-weighted average haircut amount for net-received securities.
However, the formula that was developed was oversimplified before publication, BCBS concedes. The committee is therefore offering a replacement with a “corrected formula”.
BCBS has requested that all comments on the proposed technical amendments should be submitted via the BIS website by 31 March.
On 27 March 2020, the group of central bank governors and heads of supervision decided to defer the implementation of the Basel III framework by one year to January 2023.
In addition, the Financial Stability Board (FSB) decided to also extend the implementation dates by one year for its policy recommendations related to minimum haircut standards for non-centrally cleared SFTs.
For bank-to-non-bank transactions, the updated implementation date is January 2023.
For non-bank-to-non-bank transactions, the updated implementation date is January 2025.
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