The Financial Stability Board (FSB) published on 14 October 2014 a Framework for numerical haircut floors for non-centrally cleared repo and securities lending transactions (securities financing transactions) in which financing against collateral other than government securities is provided to non-bank entities. The numerical haircut floors are set out below:
Numerical haircut floors
| Residual maturity of collateral | Haircut level | |
| Corporate and other issuers | Securitised products | |
| ≤ 1 year debt securities, and Floating Rate Notes (FRNs | 0.5% | 1% |
| > 1 year, ≤ 5 years debt securities | 1.5% | 4% |
| > 5 years, ≤ 10 years debt securities | 3% | 6% |
| > 10 years debt securities | 4% | 7% |
| Main index equities | 6% | 6% |
| Other assets within the scope of the framework | 10% | 10% |
The Framework also outlines 16 recommendations to address shadow banking risks in relation to securities financing transactions. The recommendations, and proposed timeline for implementation of each recommendation, include the following:
- National regulatory authorities (Authorities) should collect more granular data on securities lending and repo exposures including trade-level (flow) data and regular snapshots of outstanding balances (position/stock data) for repo markets. The implementation of these recommendations is ongoing.
- Total national/regional data for both repos and securities lending on a monthly basis should be aggregated by the FSB. The implementation of this recommendation is ongoing.
- Authorities should ensure that regulations governing re-hypothecation of client assets address the following principles:
- Financial intermediaries should provide sufficient disclosure to clients in relation to re-hypothecation of assets.
- In jurisdictions where client assets may be re-hypothecated for the purpose of financing client long positions and covering short positions, they should not be re-hypothecated for the purpose of financing the own-account activities of the intermediary.
- Only entities subject to adequate regulation of liquidity risk should be allowed to engage in re-hypothecation.
The implementation date for this recommendation is January 2017.
- Authorities should set qualitative standards for the methodologies that firms use to calculate collateral margins/haircuts, whether on an individual transaction or portfolio basis. In particular, regulatory authorities should seek to minimise the extent to which these haircut methodologies are pro-cyclical. This recommendation must be implemented by the Authorities by the end of 2017 and by the relevant standard setters (including the BCBS) by the end of 2015.
- For non-centrally cleared securities financing transactions in which banks and broker-dealers provide financing to non-banks against collateral other than government securities (i.e. bank-to-non-bank transactions), the Basel Committee on Banking Supervision (BCBS) should review its capital treatment of securities financing transactions and incorporate the framework of numerical haircut floors set out above into the Basel regulatory capital framework by the end of 2015.
- Following the BCBS’s incorporation of the framework of numerical haircuts floors into the Basel III framework, authorities should then implement the framework of numerical haircut floors by the end of 2017.
- Authorities should also introduce by the end of 2017 a framework of numerical floors for haircuts applicable to non-bank-to-non-bank transactions. The Framework includes a consultative proposal on this recommendation. Comments on the consultative proposal should be sent to [email protected] by 15 December 2014.
Contributed by Niall Crowley
