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Following its report of October 2011, ‘Shadow Banking: Strengthening Oversight and Regulation', the Financial Stability Board (FSB) established five Work Streams to advance its proposed policy recommendations to enhance the monitoring framework and strengthen the regulation of shadow banking (view). Work Stream 5 (WS5), which is chaired by the FSB, aims at developing recommendations ‘to dampen risks and pro-cyclical incentives associated with secured financing contracts such as repos, and securities lending that may exacerbate funding strains in times of “runs”’.
On 18 November 2012, the Financial Stability Board (FSB) published a number of documents which set out the current status of the consultations and recommendations in regard to the various Work Streams. Final recommendations are expected to be presented to G20 in September 2013.
In the report entitled ‘Consultative Document on Strengthening Oversight and Regulation of Shadow Banking: A Policy Framework for Addressing Shadow Banking Risks in Securities Lending and Repos’, WS5
This note discusses Recommendations 6 and 7 on haircuts in Section 3.1 of the WS5 paper. It assesses the Recommendations’ suitability to address stability concerns in the financial market and suggests answers to questions 11, 12, 13, 15, and 16, concerning the scope and market impact of the Recommendations.
In respect of the last question, particular attention has been paid to the practicality of the distinction by transaction type proposed by WS5, whereby securities lending transactions would be excluded according to the transaction's purpose.
In its resolution on shadow banking, the Parliament notes the importance of repo and securities lending, invited the Commission to adopt measures, among other things, allowing regulators to impose recommended minimum haircuts or margin levels for the collateralised financing markets, but without standardising them; and invited the Commission to engage in a comprehensive debate on margins.
A second note being prepared for the Parliament is considering whether transactions between jurisdictions with different legal frameworks for the holding of securities can cause particular stability concerns and/or enforcement issues in case the collateral arrangement has to be exercised and whether these concerns should be recognised within such a regulatory system of minimum haircuts, and whether open transactions should influence the level of minimum haircut or otherwise impact on the implementation of FSB recommendations.