EFAMA says it should be a priority that regulators are enabled to gain a comprehensive picture of the evolution of securities lending and repo markets and of the risks linked to behaviour patterns in the markets before deciding on recommendations on managing collateral chains.
EFAMA supports the objective of the consultation organised by the Financial Stability Board on a “Policy framework for addressing shadow banking risks in securities lending and repos” to collect more granular data on the functioning of securities lending and repo markets. It welcomes the policy recommendations in this area, as long as they are well calibrated and leveraging as much as possible on existing data collection processes and market infrastructures.
EFAMA believes that regulation that tackles leverage directly rather than indirectly through imposing minimum haircuts is a better way to address the concerns raised by the FSB and therefore represents a more effective approach to risk mitigation: “In this context, we wish to reiterate that the conditions under which European investment funds are authorised to engage in securities lending or repo transactions are already subject to regulation at EU and national levels which effectively prevents the build-up of excessive leverage", the response document states.
EFAMA suggests there will be more overall benefit from mandating robust and well calibrated methodologies to be used by market participants to calculate haircuts than from imposing mandatory haircut floors. Unintended consequence of becoming the de facto norm for those markets caused by imposing mandatory haircuts for securities lending and repos are a cause of concern: “Should mandatory haircuts nevertheless be introduced, we would then have a clear preference for haircut floors to be set at conservative backstop levels, i.e. below the prudent market standards for actual haircuts in normal circumstances. From that perspective, the numerical floors proposed by the FSB in its consultation paper appear to be sensible.”
GFMA and the IIF support the goals and the objectives of the FSB. However, as stated in GFMA’s letter dated 14 January 2013, any regulation introduced with the aim of furthering these objectives needs to be carefully tailored so as to not undermine the securities lending and repo markets, prime brokerage and other securities financing transactions, which serve several crucial roles in the financial system, as outlined in this response.
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