FSB: No case for harmonising re-hypothecation rules
The Financial Stability Board (FSB) today announced that there is “no immediate case” for internationally harmonising the regulatory standards governing the re-hypothecation of collateral.
However it has put forward two recommendations in the Re-hypothecation and collateral re-use: Potential financial stability issues, market evolution and regulatory approaches report.
The first is for the monitoring of collateral reuse activities, although it notes that progress has already been made in many markets. In the EU the SFTR will lead to the collection of data from mid-2018 and in the US and Asia some banks are reporting trades in public reports.
“The FSB considers that the successful completion of this
initiative will be an important step towards obtaining a clearer understanding
of global (and national/regional) collateral re-use activities in the securities
financing markets, and thus, reaffirms the importance of implementing the
global securities financing data collection and aggregation,” the FSB stated in
the report.
The second recommendation relates to collateral reuse
activities of non-banks.
“FSB encourages national/regional authorities to consider
monitoring collateral re-use activities beyond securities financing
transactions as appropriate,” it stated.
Beyond these recommendation the FSB reiterated its non-binding
recommendation to jurisdictions to implement Recommendation 7 in its Policy
Framework for Addressing Shadow Banking Risks in Securities Lending and Repos published
in August 2013.
The FSB also stated that re-hypothecation and collateral re-use poses potential risks to the
financial system by hindering the return of collateral in the event of an
insolvency as well as facilitate the build-up of leverage. While leverage
has been rising it is still well below pre-crisis levels.
However,
the FSB also recognised that re-hypothecation has several benefits to the financial
system: increasing capacity and lowering funding costs; mitigating pressure on
collateral supply; facilitating settlement and reducing fails; and supporting
monetary policy.
The
FSB defines re-hypothecation as “any use of client assets by a financial
intermediary” such as broker-dealers. It is a widespread practice in securities
finance and OTC derivative transactions, allowing intermediaries to put take in
collateral and put it to use financing other trades. It is also used to adhere to toughened
regulatory standards.
The FSB also published Non-Cash
Collateral Re-use: Measure and Metrics at the same time.
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