The European Securities and Markets Authority has published a research Report on securities financing transactions in the European Union and the use of collateral haircuts by firms. The purpose of ESMA's research is to outline the current level and calculation methodologies of haircuts used in the EU by SFT market participants with the overall aim of informing future discussions in the context of global regulatory policy.

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The International Organization of Securities Commissions published a report on the findings of the survey on loan funds that was carried out during 2016. The report covers loan funds in the area of investment funds and includes open-ended and close-ended funds, retail and professional investor funds. However, the report does not cover any type of securitization position or securitization special purpose vehicle. IOSCO concludes that further work on loan funds is not required at this stage because the loan fund market is a small, niche market and most jurisdictions consider that the rules already in place for funds are sufficient to address the specificities of loan funds, including the liquidity, credit and systemic risks that loan funds may pose. IOSCO will continue to monitor the loan fund market and will consider whether further work is required as the market develops.

View the report.

The Financial Stability Board published a Report on regulatory approaches to re-hypothecation of client assets. The Report is in response to the recommendation that the possibility of harmonizing client asset rules with regard to re-hypothecation should be examined as per Policy Recommendation 8 of the FSB's Policy Framework for Addressing Shadow Banking Risks in Securities Lending and Repos. The FSB's conclusion is that there is no immediate rationale for harmonizing regulatory approaches to re-hypothecation of client assets. The FSB encourages its member jurisdictions to implement the recommendation in the Policy Framework (Recommendation 7) which provides that authorities should ensure that regulations governing re-hypothecation of client assets should encompass three principles relating to sufficient disclosure to clients, use of client assets that may be re-hypothecated and limitations on the ability to re-hypothecate client assets. 

View the Report.

View the FSB Policy Framework. 

The Financial Stability Board published the final measure and metrics for non-cash collateral re-use in securities financing transactions. The measure and metrics are part of the FSB's global securities financing data collection initiative, the Standards for which were published in November 2015. The Standards identify a data element on collateral re-use eligibility to be collected for collateral received or posted for SFTs by national regulators to be provided (on an aggregated national/regional level) to the FSB. The globally aggregated data on re-use of collateral will be used to assess global trends in non-cash collateral re-use and to monitor the degree of interconnectedness in the collateral markets and the build-up of leverage.

The FSB's Report sets out the collateral re-use measure - which will only cover SFTs - and the data elements required for computing the collateral re-use measure and the associated metrics. The FSB notes that national authorities might require reporting entities to compute the collateral re-use measure themselves rather than just the underlying data. Many FSB members are currently working on the operational arrangements to initiate the official data collection and aggregation from end-2018 data. Data related to collateral re-use will be transmitted by FSB members to the FSB for global aggregation from January 2020. The FSB will review the measure and metrics of collateral re-use five years after the launch of the global data collection with regard to collateral re-use measures. The FSB encourages national authorities to consider monitoring collateral re-use activities beyond SFTs, as appropriate. 

View the Report.

The Financial Stability Board published a report on policy recommendations to address structural vulnerabilities from asset management activities. The FSB recommendations aim to address four structural vulnerabilities from asset management activities that could cause financial stability risks: (i) liquidity mismatch between fund investment assets and redemption terms and conditions for fund units; (ii) leverage within funds; (iii) operational risk and challenges in transferring investment mandates or client accounts in stressed conditions; and (iv) securities lending activities of asset managers and funds. The FSB makes 14 recommendations, some of which have been amended since the proposed recommendations were consulted on in the last half of 2016. The recommendations are addressed to national supervisors of asset management activities and to the International Organization of Securities Commissions. Certain types of data are identified that the FSB considers should be collected by national supervisors and/or IOSCO. Steps are specified that national supervisors should take to address the potential financial stability risks. For example, issuing specific guidance to facilitate the use of exception liquidity management tools and the coordination of system-wide stress testing (albeit this is still in an exploratory stage). Another recommended step included requiring asset managers to establish comprehensive risk management frameworks which also cover risks other than the orderly transfer of client accounts and investment mandates. 

View the Report. 

The European Securities and Markets Authority published a consultation paper on its proposed draft Implementing and Regulatory Technical Standards for the Securities Financing Transactions Regulation. Securities financing transactions involve the use of securities to borrow cash or other higher investment-grade securities, or vice versa. Such transactions can include repurchase transactions, securities lending and sell/buy backs. The purpose of the SFTR is to increase the transparency of such shadow banking activities. The SFTR will require both financial and non-financial market participants to report details of their SFTs to an approved EU trade repository. The draft RTS outlines the procedure and criteria for registration as a trade repository under the SFTR, the use of internationally agreed reporting standards, reporting logic and the main aspects of the structured content of SFT reports, the requirements regarding transparency of data, data collection, aggregation and comparison as well as access levels for different regulators. 

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The European Banking Authority published a consultation paper proposing an updated version of the guidelines on the implementation of the large exposures regime that was issued by the Committee of European Banking Supervisors on December 11, 2009. The large exposures regime has since been amended by the Capital Requirements Regulation and complemented by European Commission and EBA guidelines. In light of the CRR amendments, the EBA has reviewed and updated the 2009 CEBS Guidelines and presented the results of the review in the consultation paper.

US Federal Reserve Board Governor Daniel Tarullo discussed the risks of shadow banking activities at the Center for American Progress and Americans for Financial Reform Conference. He focused his remarks on the characteristics of shadow banking-related financial activities and institutions that are most likely to pose risks to financial stability, namely the risk of “runnable liabilities,” defined as short-term, “pay-on-demand” transactions that are not insured by the federal government. These transactions are thought to pose a severe risk to financial stability since their pay-on-demand feature implies that, in the event of stress caused by credit-risk concerns, wide swings in short-term interest rates, or deteriorations in market liquidity, investors may behave as they would during times of stress and redeem shares, unwind transactions or decide not to roll over positions. Tarullo stated that this type of runnable funding, while less prevalent than before the financial crisis, is a key area for prudential regulators to focus analysis and policy initiatives. He stressed that while liquidity standards, stress testing and resolution planning exist to help curb the risk of runnable funding for prudentially regulated firms, liquidity runs that could threaten financial stability may exist in the non-regulated sector. Governor Tarullo suggested a number of key issues to be considered in creating a regulatory framework for these transactions, including whether one versus multiple agencies should regulate the industry and whether or not regulation should be uniform or should be tailored to take into account the characteristics of the market actors and business models involved in the funding relationship.

View Governor Tarullo’s speech on shadow banking.

The FSB launched a consultation on proposed Policy Recommendations to Address Structural Vulnerabilities from Asset Management Activities. The FSB recommendations aim to address four structural vulnerabilities from asset management activities that could cause financial stability risks. Those vulnerabilities are: (i) liquidity transformation by investment funds; (ii) leverage within funds; (iii) operational risk and challenges in transferring investment mandates in stressed conditions; and (iv) securities lending activities of asset managers and funds. The FSB makes 14 recommendations and seeks feedback on the proposals by September 21, 2016. The FSB intends to finalize the recommendations by the end of 2016.

View the consultation paper. 

The Financial Conduct Authority published an Occasional Paper on the emerging issues and market contributions associated with market-based finance. The paper focuses on the more comprehensive concept of market-based finance, emphasizing the roles of markets and market-making mechanisms in the modern banking system. The FCA published the paper to better understand the impacts of market-based finance on the stability of the financial system as a whole. The FCA’s findings are based on a substantial review of existing literature on market-based finance, trade press and various web sources and discussions with internal and external stakeholders. 

The Financial Stability Board published its thematic review on the implementation of the FSB Framework for Shadow Banking Entities. The objective of the review was to evaluate the progress made by FSB jurisdictions in implementing the FSB’s Policy Framework, in particular, evaluating efforts by entities based on economic functions and participation in the FSB information-sharing exercise. The FSB found that, despite progress having been made, the peer review findings indicated that implementation remains at a relatively early stage. The FSB concluded that more work is required to ensure that application of the Framework is sufficiently rigorous and that jurisdictions are able comprehensively to assess and respond to risks potentially posed by non-bank financial entities.

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A form of information statement for usage by collateral takers was jointly published by five industry associations.  This is aimed at facilitating compliance with disclosure requirements under the European Union's Securities Financing Transaction Regulation. The relevant industry associations are the Association for Financial Markets in Europe, the International Capital Market Association, the International Swaps and Derivatives Association and the International Securities Lending Association. The SFTR will affect all existing and future title transfer and security collateral arrangements from July 13, 2016 and require disclosure to collateral providers where a collateral taker uses title transfer or has a right of use, with respect to a security financing transaction, such as a repo or margin loan. The purpose of the statement is to outline the general risks and consequences that may be involved in consenting to a right of use of collateral provided under a security collateral arrangement or of concluding title transfer arrangements.
 
View the information statement. 

The European Securities and Markets Authority published a discussion paper on its approach to developing technical standards required under the Securities Financing Transactions Regulation. The SFTR mostly came into effect on January 12, 2016. One exception is a new reporting obligation which is being phased in according to counterparty type. The aim of the SFTR is to improve the transparency of securities lending, repurchase transactions, reverse repurchase transactions, buy-sell back or sell-buy back transactions and margin lending transactions. The new regulations are thought to help reduce the likelihood of such activities moving to the shadow banking sector. 

Read More.

The Financial Stability Board published proposals for the identification of data elements for monitoring non-cash collateral re-use and for the development of a measure of non-cash collateral re-use. The proposals are part of the FSB's global securities financing data collection initiative, the Standards for which were published in November 2015. The Standards identify a data element on collateral re-use eligibility to be collected for collateral received or posted for securities financing transactions by national regulators for provision to the FSB.  The FSB is proposing to add possible measures of non-cash collateral re-use and related data elements into the Standards to help evaluate global trends on collateral re-use and to assess financial stability risks. Comments on the FSB's proposals are requested by April 22, 2016. The FSB intends to develop recommendations by the end of 2016.
 
View the FSB proposals.
 
View the FSB Standards for securities financing data collection.

The European Securities and Markets Authority published a peer review report on the implementation by national regulators of the Committee of European Securities Regulators' Guidelines on a common definition of European Money Market Funds. The Guidelines specify a common definition of MMFs and establish a list of criteria that funds need to comply with should they wish to be categorized as a "Money Market Fund". The Guidelines aim to improve investor protection and apply both to: (i) collective investment undertakings subject to the Undertakings for the Collective Investment of Transferable Securities Directive; and (ii) non-harmonized collective investment undertakings regulated by the national laws of a Member State, which is supervised and complies with risk-spreading rules. The peer review follows the initial peer review published in April 2013 which identified that numerous regulators had at that time failed to implement the Guidelines. This second review updates the first review and covers 8 out of 30 countries which at the time of the previous review had not fully or in part implemented the guidelines. The 8 countries are Bulgaria, the Czech Republic, Hungary, Liechtenstein, Lithuania, Latvia, Malta and Portugal. The review states that the guidelines are or are about to be fully applied in all these jurisdictions apart from Hungary, where some failings have been identified. 
 
View the Guidelines.
 
View the 2013 peer review report.
 
View the 2016 peer review report.

The EU Regulation on the Reporting and Transparency of Securities Financing Transactions and of Reuse, known as the SFTR was published in the Official Journal of the European Union. The aim of the SFTR is to improve the transparency of securities lending, repurchase transactions, reverse repurchase transactions, buy-sell back or sell-buy back transactions and margin lending transactions which will help reduce the likelihood of banks seeking to avoid rules applicable to them by moving certain of their activities to the shadow banking sector. The SFTR requires: (i) all securities financing transactions, subject to certain exceptions for central banks and similar bodies, to be reported to EU recognized trade repositories; (ii) investment funds to disclose their use of SFTs to investors in regular reports and pre-investment documents; and (iii) minimum conditions to be met on the reuse of collateral, such as disclosure of risks and the need to obtain prior consent. The SFTR also makes certain amendments to the European Market Infrastructure Regulation, including inserting provisions through which equivalence decisions for third country trading venues for the purpose of OTC derivatives can be made and adding a number of authorities to the list of authorities to which trade repositories must provide trade reporting information. The SFTR will apply directly across the EU from January 12, 2016 subject to certain exceptions which will apply at a later date, including the reporting obligation (which is being phased in according to counterparty type), the transparency obligations on management companies and Alternative Investment Fund Managers, and the restrictions on rehypothecation.
 
View the Regulation.

The Basel Committee on Banking Supervision launched a consultation on the identification, assessment and measurement of step-in risk. The proposed framework would form the basis for identifying, assessing and addressing step-in risk that is potentially embedded in banks' relationships with shadow banking entities. The Basel Committee refers to step-in risk as the risk that a bank may provide financial support to an entity that is under financial stress beyond or without any contractual obligations to do so to protect itself from any adverse reputational risk that may result from its connection to the entity. The proposals only apply to unconsolidated entities (i.e. entities that are outside of the regulatory scope of consolidation). The proposed framework includes descriptions of the relationships and indicators that characterize such relationships between banks and shadow banking entities, such as capital ties, sponsorship, provision of financial facilities, decision-making and operational links. The Basel Committee proposes that any step-in risk that is identified could be addressed through prudential measures, such as through quantitative requirements or by bringing the relevant entity within regulatory consolidation. The consultation closes on March 17, 2016.

View the consultation paper.

The European Banking Authority published final Guidelines on requirements for banks and certain investment firms to have sufficient information about, and to set limits on, their individual and aggregate exposure to shadow banking entities which carry out certain banking-like activities, such as lending, outside a regulated framework. The EBA is mandated to produce the Guidelines under the Capital Requirements Regulation which limits the exposure a firm can have to a single client or group of connected clients (more generally known as limits to large exposures). In order to prepare the Guidelines, the EBA collected data from 148 EU firms on their exposures to shadow banking entities, the results of which are published in a separate report. Both the Report and the Guidelines will help inform the European Commission's report on the appropriateness and impact of imposing such limits, which may be accompanied by a legislative proposal. The EBA Guidelines will apply from January 1, 2017.

View the Guidelines.

View the EBA's report.

US Federal Reserve Board Vice Chairman, Stanley Fischer, delivered remarks at the “Financial Stability: Policy Analysis and Data Needs” 2015 Financial Stability Conference sponsored by the Federal Reserve Bank of Cleveland and the Office of Financial Research. In his speech, Mr. Fischer discussed vulnerabilities of the US financial system and risks posed by shadow banking. While he praised steps taken by banking regulators to strengthen financial stability generally, including requirements for more and higher-quality capital and other loss-absorbing capacity for banks, liquidity buffers and stress testing for banks, new margin requirements for uncleared derivatives transactions, mandated clearing of certain derivatives to central counterparties, and the designation of systemically important nonbank financial institutions, Mr. Fischer still believes that regulators’ views of developments in the shadow banking sector remain incomplete. Mr. Fischer noted that the lack of data available regarding nonbank financial institutions can impair the development of regulations in this sector and thereby pose a threat to the financial system. He calls for policymakers to improve data collection efforts and focus on modeling interconnectedness between shadow banking, banks and the larger financial system in order to better understand the interdependencies between the banking system and nonbank financial institutions.

View Mr. Fischer’s speech.

The Financial Stability Board published its finalized standards and processes for global securities financing data collection and aggregation. The report sets out the data that national regulators are to report as aggregates to the FSB, for financial stability purposes. The standards, amongst other things, define the data elements for repurchase agreements, securities lending and margin lending that national regulators will be asked to report to the FSB. The report also sets out recommendations for national regulators on the collection of data from market participants, so that timely and comprehensive visibility into trends and developments in these markets can be obtained.
 
View the FSB's standards and processes.

The Financial Stability Board published a report to the G20 Leaders on transforming shadow banking into resilient market-based finance. The report sets out the actions taken so far to address concerns raised over the past year associated with financial stability and shadow banking, such as the FSB's annual monitoring exercise to assess global trends and risks in the shadow banking system. This year's monitoring exercise covered 26 jurisdictions, four of which represent around 80% of global GDP and 90% of global financial system assets. The FSB has also taken steps to strengthen the oversight and regulation of shadow banking, in particular in the area of securities financing. The report also sets out the next steps required to transform shadow banking into resilient market-based financing, including on: (i) the implementation of the regulatory framework for haircuts on non-centrally cleared SFTs at the international level; (ii) the implementation of policy recommendations related to structural aspects of the securities financing markets; and (iii) the monitoring of global trends and risks in the shadow banking system. The FSB intends to report further on its progress in September 2016. On the same day, the FSB also published its 2015 global shadow banking monitoring report, regulatory framework for haircuts on non-centrally cleared securities financing transactions as well as its updated roadmap towards strengthened oversight and regulation of shadow banking in 2015.
 
View the FSB's report and related documents.

Governor Daniel K. Tarullo spoke on "Capital Regulation Across Financial Intermediaries" at the Banque de France Conference on Financial Regulation entitled "Stability versus Uniformity; A Focus on Non-bank Actors." In the speech, Governor Tarullo remarked on the importance of relying on more than quantitative measures when establishing regulatory requirements for non-bank financial institutions. He stated that "simply deciding that an intermediary provides mostly commercial banking services or insurance products does not fully answer the question of what its capital requirement should be." As an example of a rule in which a more nuanced approach was taken, he pointed to the use of short-term wholesale funding measures in the US G-SIB surcharge requirement.

View the speech.
 

The ​International Organization of Securities Commissions published its final report on the peer review of the regulation of Money Market Funds. The report sets out the implementation progress of 31 jurisdictions in adopting legislation, regulation and policies relating to MMFs. The review covers eight areas of reform: (i) the scope of regulatory reform, including a definition of MMFs in regulation and other investment products that have similar features and investment objectives to MMFs; (ii) limitations to the types of risks and assets that are taken by MMFs; (iii) valuation practices of MMFs; (iv) liquidity management for MMFs; (v) possible risks that may arise that could affect the stability of MMFs offering a stable net asset value; (vi) use of credit ratings by the MMF industry; (vii) disclosure to investors; and (viii) practices related to repurchase agreement transactions. The review found that all participating jurisdictions had progressed in the implementation of measures across the areas of reform, that progress varied between different jurisdictions and that the global MMF market was dominated by five jurisdictions, being the US, France, Luxembourg, Ireland and China. The US, Brazil, India, Italy and Thailand are the only jurisdictions that have fully implemented measures across all eight reform areas.

View the report.
 

The Financial Stability Board announced a peer review on the implementation of its shadow banking framework, excluding money market funds. The review will assess the extent to which FSB‑member jurisdictions have adequately assessed shadow banking entities based on the economic functions that they undertake, adopted tools to mitigate any identified financial stability risks, implemented reporting requirements for public disclosure by shadow banking entities of certain risks and implemented arrangements, systems and processes for authorities to collect and analyze information about the risks that shadow banking entities pose. Questionnaires will be provided to FSB members for completion and to feed back into the review report, which will be published in early 2016. The FSB is also inviting financial market participants and stakeholders to comment by July 24, 2015, on means of updating the regulatory perimeter, types of information needed to assess shadow banking risks, methods for enhancing transparency of shadow bank entities’ risks and the design of policy tools to mitigate financial stability risks posed by shadow banking entities.

View the terms of reference for the peer review.

The Council of the European Union and the European Parliament announced that they had reached agreement on the text of the proposed Regulation on Reporting and Transparency of Securities Financing Transactions, known as SFTR. The aim of the SFTR is to improve the transparency of securities lending, repurchase transactions, reverse repurchase transactions, buy-sell back or sell-buy back transactions and margin lending transactions which will help reduce the likelihood of banks seeking to avoid rules applicable to them by moving certain of their activities to the shadow banking sector. The SFTR, once finalized, will require: (i) all securities financing transactions, subject to certain exceptions for central banks and similar bodies, to be reported to EU recognized trade repositories; (ii) investment funds to disclose their use of SFTs to investors in regular reports and pre-investment documents; and (iii) minimum conditions to be met on the reuse of collateral, such as disclosure of risks and the need to obtain prior consent. The politically agreed SFTR must be technically finalized before the official legal text can be adopted by the European Parliament, which is currently scheduled for October 2015.

View the European Council's press release.

View the European Parliament's press release.

The International Monetary Fund recently published two chapters for its annual Global Financial Stability Report discussing the risks mutual funds and local lenders may pose to financial stability. The two chapters are titled: “Chapter 2: International Banking After the Crisis: Increasingly Local and Safer?” and “Chapter 3: The Asset Management Industry and Financial Stability.” The IMF warns that mutual funds are increasingly crowding into the same securities, especially bond funds, and that this “herding behavior” may lead to financial instability.

View the chapter.

The Financial Stability Board and the International Organization of Securities Commissions published for second public consultation Assessment Methodologies for Identifying Non-Bank Non-Insurer Global Systemically Important Financial Institutions. The proposed methodologies for identifying NBNI G-SIFIs take into consideration the responses received to the first consultative document issued in January 2014. These methodologies contain a high-level framework and an operational framework for identifying G-SIFIs that would apply across NBNI financial entities, as well as detailed NBNI sector-specific methodologies for finance companies, market intermediaries, investment funds and asset managers. The proposed methodologies provide for a more supervisory judgment compared to the Global Systemically Important Banks and Global Systemically Important Insurers methodologies to counter limitations in data availability and the range of business models of different types of NBNI G-SIFIs. The consultative document does not propose any specific entities for designation, nor any policy measures that would apply to NBNI G-SIFIs. It is intended that the policy measures will be developed once the methodologies are finalized. Comments should be submitted by May 29, 2015.

View the second public consultation