The FSB published comments on its August 2013 report that included consultative proposals on minimum standards for methodologies to calculate haircuts on non-centrally cleared securities financing transactions and a framework of numerical haircut floors.
AIMA acknowledges the importance of building a regulatory framework that seeks to limit procyclical margin calls. However, it does not believe that the establishment of numerical haircut floors is likely to reduce procyclicality meaningfully, given the absence of comprehensive data that could be used to calibrate numerical floors. At the same time, the introduction of numerical floors could impact negatively on the ability of hedge fund managers to negotiate appropriate haircuts on a contractual basis.
As such, AIMA believes that the FSB should attach greater weight to the tools which are already available to market participants in the assessment of counterparty eligibility, either before or during contractual negotiations. These tools in many cases negate the need for the sort of additional regulatory provisions envisaged in the FSB paper. In particular, AIMA refers to the general assessment of counterparty credit risk that market participants undertake in the early stages of a counterparty relationship; if a potential counterparty is deemed not to be sufficiently creditworthy, a market participant is at liberty to refuse to contract with such entity. If the creditworthiness is sub-optimal, a market participant may request that the counterparty’s obligations are collateralised accordingly.
If, however, the FSB does ultimately decide to recommend a framework of numerical floors on haircuts, AIMA believes that the framework should apply to “regulated intermediaries” as defined in section 4.1 of the Proposals; a framework that applies only to situations in which an entity not subject to regulation of capital and liquidity/maturity transformation receives financing from a regulated intermediary will inevitably harm competition, potentially leading to regulatory arbitrage.
Finally, AIMA encourages the FSB to consider the fact that any policy measures in respect of shadow banking need to take into account global credit contraction and reduced overall market liquidity, as well as the potential impact on the availability of unencumbered assets. Measures that are not properly calibrated could have a harmful impact on the functioning of securities financing markets, with harmful consequences for economic activity.
BBVA believes that he minimum standard haircuts under this framework should be coordinated with the haircuts established by central banks in their open market operations. “Should the minimum standard haircuts be higher than the ones determined by the central banks, some unintended consequences may arise", the response paper warns. Such consequences, according to BBVA, may include:
Incentives for the banking system to raise funding from central banks, rather than accessing other market participants, increasing the dependence of entities to central banks’ liquidity.
Incentives for the banking system to post to central banks assets for which the difference between the minimum standard haircut and the central bank haircut is larger. This is an arbitrage opportunity banking entities would exploit giving rise to risk concentration on central banks’ balance sheets.
Market distortions; securities in which a large difference occur between the minimum haircut stemming from this framework and the haircut established by a central bank, will tend to be allocated on the balance sheet of the banking entities with direct access to funding from this central bank.
To prevent duplicities, unnecessary burdens, wrong incentives, unfair advantages and market distortions, BBVA suggests that for transactions in which a regulated financial entity receives financing, the minimum standard haircuts under this framework should not be higher than the haircuts the central banks establish to apply on their main monetary policy operations, in case collateral is represented by assets included in the eligible pool of the central bank of the monetary area in which the regulated entity is established: “An adjustment to the minimum standard haircuts, when the maturity of the securities financing transaction deviates from the maturity of the central bank main monetary policy operation, will have to be taken in consideration.“
EFAMA strongly supports the objective of the FSB of collecting more granular data on the functioning of securities lending and repo markets and welcomes the policy recommendations developed in this area , to the extent that they are well calibrated and leveraging as much as possible on existing data collection processes and market infrastructures. Priority should be given to the implementation of these policy recommendations in order for regulators to gain a more comprehensive picture of how securities lending and repo markets are evolving and of the risks associated with behavior patterns in these markets before deciding on policy recommendations on managing collateral chains through haircuts or otherwise.
In principle, 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, EFAMA wishes 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.
EFAMA believes that there will be more overall benefit from mandating robust and well calibrated methodologies to be used by market participants to calculate haircuts (as is already the case for investment funds in Europe) than from imposing mandatory haircut floors.
EFAMA is concerned that imposing mandatory haircuts for securities lending and repos may have the unintended consequence of becoming the de facto norm for those markets. Should mandatory haircuts nevertheless be introduced, EFAMA 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.
All public responses
The FSB will use the comments as an input to its work to finalise policy recommendations in the second quarter of 2014.
Original FSB-report, 29.8.13
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