15 October 2014

FSB publishes regulatory framework for haircuts on non-centrally cleared securities financing transactions

The Framework aims to limit the build-up of excessive leverage outside the banking system and to help reduce the procyclicality of that leverage. It consists of: (i) qualitative standards for methodologies used by market participants that provide securities financing to calculate haircuts on the collateral received; and (ii) numerical haircut floors that will apply to non-centrally cleared securities financing transactions in which financing against collateral other than government securities is provided to entities other than banks and broker-dealers (referred to for simplicity as "non-banks").

In revising the Framework, the Financial Stability Board (FSB) has decided to raise the levels of numerical haircut floors based on the QIS results, existing market and central bank haircuts, and data on historical price volatility of different asset classes. It has also decided to propose applying the numerical haircut floors to non-bank-to-non-bank transactions so as to ensure shadow banking activities are fully covered, to reduce the risk of regulatory arbitrage, and to maintain a level-playing field. The consultative proposal in this regard is set out in Annex 4 of the Framework document. Comments on that proposal should be submitted by 15 December 2014.

The FSB will complete its work on the application of numerical haircut floors to non-bank-to-non-bank transactions and set out details of how it will monitor implementation by the second quarter of 2015. FSB member authorities will implement the Framework, including the numerical haircut floors, by the end of 2017.

In addition to the Framework document, the FSB published a background document entitled Procyclicality of Haircuts: Evidence from the QIS1. This background document examines the procyclicality of haircuts on non-centrally cleared securities financing transactions and their role during the global financial crisis based on the first stage QIS (QIS1) data. The FSB hopes this will provide additional insights to the discussions on procyclicality of haircuts that take place in the academic literature and elsewhere.

Daniel Tarullo, Chairman of the FSB Standing Committee on Supervisory and Regulatory Cooperation stated that "Securities financing transactions such as repos are important funding tools for a wide range of market participants, including non-bank financial firms. The implementation of the numerical haircut floors on securities financing transactions will reduce the build-up of excessive leverage and liquidity risk by non-banks during peaks in the credit and economic cycle. It will be important for the FSB to monitor the impact of the framework following the implementation to help ensure that it achieves these objectives".

Full press release

Full Regulatory Framework

Full Procyclicality of Haircuts

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