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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
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
Beyond these recommendation the FSB
reiterated its non-binding recommendation to jurisdictions to
Recommendation 7 in its Policy Framework for Addressing
Shadow Banking Risks in Securities Lending and
Repos published in August
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
Re-use: Measure and Metrics at the same