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07 January 2016

GFMA comments in response to BCBS consultation on haircut floors for non-centrally cleared securities financing transactions

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While the Global Financial Markets Association generally supports the underlying policy goal of the proposal, it has some concerns and questions about its integration into the overall capital framework.

The associations  note that the Proposal envisions a novel, untested form of SFT regulation that relies upon application of computationally complex formulas to a wide range of transactions and a severe, single-sanction penalty that is unscaled to the degree of non-compliance. Moreover, we believe the Proposal is unclear in many areas as to whether and, if so, how the haircuts would apply to certain netting sets. In addition, due to shortcomings in the calculation methodology, we believe that mechanistic application of haircut minimums will result in anomalous or unintended outcomes in many cases.

The Proposal contemplates running all SFTs through complex formulas, considering both trade level and netting set exposures, in a manner previously untested in regulatory capital standards. There are significant ambiguities in the framework and, in some cases, anomalous or illogical outcomes appear to result from netting set calculations. A single sanction penalty is also an extremely blunt tool, which fails to account for de minimis or temporary collateral shortfalls, or to permit corrections where individual trades with appropriate collateralization nonetheless fail the netting set collateralization test. In light of these concerns, the associations recommend a multi-step review process integrating both quantitative and qualitative reviews to identify SFTs where higher capital requirements should apply to advance the policy goals of the FSB and the BCBS.

The associations request that the BCBS clarify that transactions with banks and broker-dealers subject to adequate capital and liquidity regulation on a consolidated basis are outside the scope of the Proposal. In particular, broker-dealers play a critical role in secured financing markets, and are subject to robust supervision and regulation at both the legal entity level and, where applicable, within consolidated banking groups. Failure to recognize broker-dealers and equivalently capitalized entities as regulated would represent a major break from the FSB framework and would disrupt the orderly operation of securities markets.

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