A new report from two industry associations has warned regulators how the impacts of incoming rules for repo and securities lending could have a knock-on effect on the wider global economy.
The Global Financial Markets Association (GFMA) and the International Capital Market Association (ICMA) assessed the impact of post-crisis regulation on the functioning of the global repo and securities financing transactions (SFT) markets, and both parties have subsequently recommended a series of policy reviews.
The report found that post-crisis regulations have had a profound impact on banks’ SFT businesses with a significant increase in capital requirements, which could detrimentally impact the securities lending market and the way the repo market functions under stressed scenarios.
The report also highlighted how changes in the cost of SFTs have affected banks’ product offerings and client choices, as well as how volatility in some repo markets has impacted the selection of IBOR (Interbank Offered Rate) replacement rates.
“It is clear that regulation is a key driver of changes in the way the repo and broader SFT markets operate today and how they will evolve in the near future,” said Godfried De Vidts, chair of the ICMA European Repo and Collateral Council.
“While the markets have thus far proved resilient, they are still some way from reaching a new normality, with regional markets at different stages of that evolution reflecting divergent implementation of regulatory reforms on different timelines, and the impact of future regulatory reforms remains a key concern. Hence it is important to conduct review of the coherence and calibration of the post-crisis regulatory framework, particularly pertaining to how it impacts the repo market, and to ensure that any proposed further reforms are subjected to robust impact analysis.”
The study assessed the impact of the proposed minimum haircuts for SFTs, which were introduced as part of the Basel III framework in 2017 in order to limit leverage banks provide to the non-bank sector.
As part of the recommendations, the associations have suggested the minimum SFT haircuts regime should be reviewed in line with policy objectives to address unregulated markets in order to avoid significant disruptions to the repo and securities lending market.
Additionally, the two bodies said the FSB and Basel Committee on Banking Standards should review the coherence and calibration of the post-crisis regulatory framework, particularly pertaining to how it impacts the repo market.
They added that the treatment of repo transactions backed by the highest quality government bonds should be reviewed in order to ensure that the private sector market has the capacity to absorb QE unwind and to operate without significant reliance on central banks during normal and stressed market conditions.