FSB Sets Out Stricter Collateral Rules on Securities Financing

The Financial Stability Board (FSB) has issued tougher collateral rules for non-centrally cleared securities financing transactions, bringing in non-bank firms into the scope of the regulations.

The FSB, an international body representing central banks from the G20 countries, published a set of guidelines on Tuesday which will force banks to impose a discount of at least 6% on the collateral they receive from non-bank institutions, higher than the 4% haircut they originally proposed.

The rules will also make it more expensive for hedge funds, asset managers and insurance companies to raise capital from repos.

The FSB has also issued a consultative proposal on the application of haircuts to non-bank-to-non-bank transactions, which the FSB says it will complete its work on by the second quarter of 2015. The FSB states that this will ensure shadow banking activities are fully covered and will maintain a level-playing field.

“The regulatory framework for haircuts on securities financing transactions… addresses important sources of leverage and the level of risk-taking in the core funding markets,” says Mark Carney, chairman of the FSB.

Securities financing involves short-term lending and borrowing of shares between banks and financial institutions. The value of the market is estimated to be $3.9 trillion across the globe.

Repos are a major source of short-term finance for institutions, allowing them to use securities as collateral for short-term loans from investors.

“Securities financing transactions such as repos are important funding tools for a wide range of market participants, including non-bank financial firms,” adds Daniel Tarullo, chairman of the FSB Standing Committee on Supervisory and Regulatory Cooperation.

“The implementation of the numerical haircut floors on securities financing transactions will reduce the build-up of excessive leverage and liquidity risk by non-banks during peaks in the credit and economic cycle.”