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30 January 2015

Reuters: Fed to propose margin rule aimed at shadow banking

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The Federal Reserve plans to propose a rule that applies minimum margin requirements to certain forms of securities financing deals, in a move aimed at reining in the shadow banking industry.

Fed Governor Daniel Tarullo, the central bank's chief overseer of its bank regulation, said the Fed aims to take a margin requirement rule passed last year by the Financial Stability Board (FSB), a global group of regulators, and apply it to the United States.Tarullo said asset managers and clearing houses, too, require more attention from regulators, given the risks these financial entities carry. "There is a risk that in periods of stress, investor redemptions could exhaust available liquidity. Under some circumstances, a fund might respond by rapidly selling assets," a move that could impact other holders of similar assets, he said. He said the FSB's rule should be applied to all major financial markets, given how these financing transactions move across borders.

Fed officials have been increasingly concerned over the past year about the shadow banking industry, comprising hedge funds and other types of non-bank lenders, and the risks it poses to financial stability. "We will welcome comments on this proposal when, as I expect, the Federal Reserve issues a notice of proposed rulemaking to implement it domestically, probably by using the Federal Reserve's authority under the Securities Exchange Act of 1934 to supplement our prudential regulatory authorities," Tarullo said.

There were risks tied to asset managers as well, said Tarullo, speaking at an event sponsored by the U.S. Office of Financial Research and the government's financial stability council. Regulators needed to pay more attention to clearing houses, which stand between buyers and sellers of financial instruments such as derivatives, he said.

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© Reuters

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