08 October 2013

Risk.net: Shadow banking crackdown raises transparency concerns for insurers

National regulators are currently examining proposals from the Financial Stability Board (FSB) to control shadow banking activities and are expected to bring existing rules in line with the FSB's recommendations. The FSB is calling for enhanced public disclosure requirements and a more granular and regular collection of data by supervisors. While experts say enhanced transparency is generally positive, the fact that the recommendations remain vague raises concerns about the scope of the rules.

William Kelly, New York-based global head of securities finance business at BNY Mellon, says: "The issue around transparency and information depositories formally represents a change from where we stand today as transparency has been left to the relationship between clients and provider".

The question is whether the FSB's transparency requirements can be of use to the industry, says Kelly. "It remains to be seen if they are drafted from a risk perspective or from a trading-detailed perspective, recognising, from a risk perspective, that this would aggregate [the] amount of activity, the forms of collateral and aggregate exposure that exist within the system versus loan detail that would also include loan pricing information."

It is not clear yet how the proposed information tables will be populated, what disclosures will be compulsory and what the frequency of distribution will be. It is also unclear who, other than supervisors, will have access to the relevant information.

The FSB's proposals also cover the use and valuation of collateral and also raise the possibility of using central counterparty clearing houses (CCPs) to clear securities lending transactions.

In return for lent securities, insurers usually receive collateral in cash – which is the prevalent form of collateral in the US – or highly liquid securities. The FSB recommends that regulators impose minimum standards for the reinvestment of cash collateral to limit liquidity risks, which may disallow maturity transformation or investment in very illiquid assets.

Another recommendation calls for minimum valuation standards for collateral to be put in place, which would require insurers to value their collateral more frequently and at fair value. While many say the proposals are generally seen as being consistent with good market practice, national supervisors will need to bring existing rules in line with the FSB recommendations.

Guidelines have also been issued by the Financial Services Authority (FSA) on collateral upgrade transactions, whereby insurers swap liquid securities for illiquid assets with banks. The Prudential Regulation Authority has since adopted those guidelines.

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