In a consultation paper that is part of a broader effort to finalize new rules for “shadow banks,” the FSB is proposing a set of new standards for securities-lending and repurchase-agreement (repo) activities regardless of where these occur. Although in many instances cast as “high-level principles,” the FSB’s policies are in most respects very detailed and thus may prove problematic as a binding global framework, especially if extended as desired to all market participants. Key features of the framework include new hair-cuts for securities-lending transactions, with the FSB seeking views also on specific regulatory minimums that would serve as floors for national or industry practice. The consultation also outlines limits on rehypothecation – the ability of lenders to use collateral – that could adversely affect profit in this sector while addressing FSB risk-management objectives. The FSB is also proposing an array of new reporting and public-disclosure requirements that, while intended to promote market transparency and regulatory capability, could force release of data that market participants now consider proprietary. These, along with many other aspects of the consultation, would impose significant operational burdens on financial institutions, but the FSB argues that a regime along its proposed lines is necessary to address the systemic risk evident in this sector during the financial crisis. The consultation also suggests structural changes to these activities, for example seeking views on the benefits of using central counterparties for securities-financing transactions and/or changing the way repos are handled in bankruptcy.

The full report is available to retainer clients. To find out how you can sign up for the service, click here