In conjunction with its overall work on “shadow banking,” the Financial Stability Board has released a policy framework and consultation on ways to reform repurchase agreements (repos) and securities financing transactions (SFTs). Although acknowledging the market-efficiency and other benefits these instruments bring, the FSB remains committed to requirements designed to limit the ability of banks and non-banks to use short-term funding in what it believes to be a high-risk fashion. As a result, the new framework lays out limits on SFT to prevent procyclical build-up of leverage in the financial system, as well as to prevent collateral firesales under stress. Also worried by rehypothecation, the framework requires additional restrictions and client disclosures. A key proposal – minimum floors on certain SFT transactions by unregulated institutions – would be implemented through adding new capital and/or margin requirements on banks or other regulated intermediaries once a new quantitative survey evaluating its impact is completed.

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