BCBS addresses ambiguity in minimum haircut standards for SFTs
02 July 2021 Switzerland
Image: anderm/adobe.stock.com
The Basel Committee on Banking Supervision (BCBS) has released a technical amendment relating to minimum haircut floors for securities financing transactions (SFTs).
This amendment addresses a provision in the Basel Framework relating to collateral transformation trades which was open to misinterpretation.
It also publishes a correction for the formula for netting sets of SFTs which was published incorrectly in CRE56.10 of the Framework.
The Basel Committee released the two proposed revisions for consultation in January 2021.
After receiving comments, the Committee has adopted both proposed amendments in their original form, as circulated in the consultation paper.
The Basel Framework, in chapter CRE56, requires banks to verify that haircuts on collateral in SFTs comply with a set of minimum floors.
CRE56.4 provides an exemption, for cash-collateralised securities lending trades, if a counterparty receives cash as collateral and reinvests this in a way that meets specified minimum standards.
The chapter previously stated: “Banks that lend securities are exempted from the haircut floors on collateral upgrade transactions if they are unable to re-use, or provide representations that they do not and will not re-use the securities received as collateral against the securities lent.” (BCBS emphasis)
The Basel Committee advised that this element of CRE56.5 was open to misinterpretation since it implied that a bank itself is subject to restrictions on collateral re-use, whereas the paragraph should imply that it is the bank’s counterparty that is subject to these restrictions.
CRE56.5 has been reworded to address this ambiguity.
The technical amendment also corrects a formula provided in CRE56.10, for calculating the portfolio haircut floor for SFT netting. According to the Committee: “the formula that was developed was oversimplified before publication”.
Technical amendments are defined as changes in standards that are not substantial in nature, but that cannot be resolved unambiguously based on the current text.
This amendment addresses a provision in the Basel Framework relating to collateral transformation trades which was open to misinterpretation.
It also publishes a correction for the formula for netting sets of SFTs which was published incorrectly in CRE56.10 of the Framework.
The Basel Committee released the two proposed revisions for consultation in January 2021.
After receiving comments, the Committee has adopted both proposed amendments in their original form, as circulated in the consultation paper.
The Basel Framework, in chapter CRE56, requires banks to verify that haircuts on collateral in SFTs comply with a set of minimum floors.
CRE56.4 provides an exemption, for cash-collateralised securities lending trades, if a counterparty receives cash as collateral and reinvests this in a way that meets specified minimum standards.
The chapter previously stated: “Banks that lend securities are exempted from the haircut floors on collateral upgrade transactions if they are unable to re-use, or provide representations that they do not and will not re-use the securities received as collateral against the securities lent.” (BCBS emphasis)
The Basel Committee advised that this element of CRE56.5 was open to misinterpretation since it implied that a bank itself is subject to restrictions on collateral re-use, whereas the paragraph should imply that it is the bank’s counterparty that is subject to these restrictions.
CRE56.5 has been reworded to address this ambiguity.
The technical amendment also corrects a formula provided in CRE56.10, for calculating the portfolio haircut floor for SFT netting. According to the Committee: “the formula that was developed was oversimplified before publication”.
Technical amendments are defined as changes in standards that are not substantial in nature, but that cannot be resolved unambiguously based on the current text.
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
