FSB Publishes Regulatory Framework for Haircuts on Securities Financing Transactions (with Lofchie Comment)
The Financial Stability Board ("FSB") published a Regulatory Framework for Haircuts on Non-Centrally Cleared Securities Financing Transactions (the "Framework"). The Framework comprises a fundamental part of the FSB's policy recommendations to address shadow banking risks in relation to securities financing transactions, and takes into account comments received on the consultative proposals issued on August 29, 2013, as well as the results of a two-stage quantitative impact study.
According to the FSB, the Framework aims to limit the buildup of excessive leverage outside the banking system and reduce the procyclical aspects of that leverage. It consists of: (i) qualitative standards for methodologies used by market participants that provide securities financing to calculate haircuts on the collateral received; and (ii) numerical haircut floors that will apply to non-centrally cleared securities financing transactions in which financing against collateral other than government securities is provided to entities other than banks and broker-dealers.
In revising the Framework, the FSB explained, it decided to propose raising the levels of numerical haircut floors and applying the numerical haircut floors to non-bank-to-non-bank transactions. Comments on the proposal should be submitted by December 15, 2014.
The FSB stated that it will complete its work on the application of numerical haircut floors to non-bank-to-non-bank transactions, and will set out the details of the implementation by the second quarter of 2015. FSB member authorities will implement the Framework, including the numerical haircut floors, by the end of 2017.
In addition to the Framework, the FSB published a background document, titled "Procyclicality of Haircuts: Evidence from the QIS1," which examines the procyclicality of haircuts on non-centrally cleared securities financing transactions and their role during the financial crisis.
Lofchie Comment: The intent of the revised Framework appears to be to (i) drive financing transactions out of non-banks and (ii) significantly motivate the use of government securities collateral over other types of collateral. These are decisions that have such significance for the economy and the structure of the financial markets that they warrant a broad discussion about their aims, the reasoning behind them and the process by which they are made. Some of the issues that should be addressed include: whether the Framework is intended to drive investors to finance the government rather than the private sector, whether it is appropriate to discourage lending by non-banks, and which regulators or elected officials should be involved in making decisions of the type contemplated by the document.
See: FSB Press Release.