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FSB: No case for harmonising re-hypothecation rules

25 January 2017

The FSB has stated there is ‘no immediate case for harmonising regulatory approaches to re-hypothecation’ but makes two recommendations

Read more: FSB re-hypothecation reuse SFTR

The Financial Stability Board (FSB) today announced that there is "no immediate case" for internationally harmonising the regulatory standards governing the re-hypothecation of collateral.

However it has put forward two recommendations in the Re-hypothecation and collateral re-use: Potential financial stability issues, market evolution and regulatory approaches report.

The first is for the monitoring of collateral reuse activities, although it notes that progress has already been made in many markets. In the EU the SFTR will lead to the collection of data from mid-2018 and in the US and Asia some banks are reporting trades in public reports.

"The FSB considers that the successful completion of this initiative will be an important step towards obtaining a clearer understanding of global (and national/regional) collateral re-use activities in the securities financing markets, and thus, reaffirms the importance of implementing the global securities financing data collection and aggregation," the FSB stated in the report.

The second recommendation relates to collateral reuse activities of non-banks.

"FSB encourages national/regional authorities to consider monitoring collateral re-use activities beyond securities financing transactions as appropriate," it stated.

Beyond these recommendation the FSB reiterated its non-binding recommendation to jurisdictions to implement Recommendation 7 in its Policy Framework for Addressing Shadow Banking Risks in Securities Lending and Repos  published in August 2013.

The FSB also stated that re-hypothecation and collateral re-use poses potential risks to the financial system by hindering the return of collateral in the event of an insolvency as well as facilitate the build-up of leverage. While leverage has been rising it is still well below pre-crisis levels.

However, the FSB also recognised that re-hypothecation has several benefits to the financial system: increasing capacity and lowering funding costs; mitigating pressure on collateral supply; facilitating settlement and reducing fails; and supporting monetary policy.

The FSB defines re-hypothecation as "any use of client assets by a financial intermediary" such as broker-dealers. It is a widespread practice in securities finance and OTC derivative transactions, allowing intermediaries to put take in collateral and put it to use financing other trades. It is also used to adhere to toughened regulatory standards.  

The FSB also published Non-Cash Collateral Re-use: Measure and Metrics at the same time.

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