The report below indicates that a lack of data means the conclusions are not fully grounded. The recommendations below suggest that the SFT market will see new regulations in future which will bring new restrictions on the SFT market. An obligation to report SFTs begins via the SFTR regulation (In Europe) at the end of 2018. In the mean time ESMA say:
Securities financing transactions (SFTs) can contribute to leverage in the financial system. One of the main issues related to leverage is procyclicality, which can manifest itself in many different ways and can incorporate risks for financial stability. The setting of margins and haircuts in relation to SFTs can also have procyclical effects. Other aspects that might lead to procyclicality include lending volumes, willingness to deal with some counterparties, collateral requirements, and other SFT price or non-price credit terms.
There are different definitions of leverage (gross and net, entity-specific or system-wide) which need to be adequately analysed in order to define the appropriate tools aimed at limiting procyclicality. Several micro-prudential measures addressing leverage in individual entities are already in place or currently being implemented in the EU, notably through EMIR or CRR/CRD and other relevant prudential regulation.
The current lack of granular SFT data at EU level prevents a thorough analysis of EU SFT markets, and hampers our understanding of the effects of the recent regulatory reforms and those that are still being implemented on leverage and procyclicality. (Reporting will start by the end of 2018 - Bill)
This report was prepared in cooperation with the EBA and the ESRB. The EBA contribution focuses on the EU banking sector regulation that is relevant in the context of leverage and SFTs. The ESRB contribution, published in parallel on the ESRB website, informed various parts of the ESMA report, including the conceptual descriptions and analysis. However, on some issues, including in its recommendations, the ESMA report takes different views to those expressed in the ESRB opinion.
ESMA recommends that:
- The FSB qualitative standards on the methodology used to calculate haircuts in non- centrally cleared SFTs should be introduced as a first step to improve the transparency and stability of haircuts, and the resilience of financial institutions;
- The procyclicality of collateral haircuts used by CCPs should be addressed in the context of the EMIR review;
- Numerical haircut floors for non-centrally cleared transactions, such as those set out by the FSB, can only be introduced and calibrated following a thorough analysis using granular SFT data (which will become available after the full implementation of the SFTR), and following careful assessment of the scope, considering in particular the size and relevance of EU government bond markets;
- Other macroprudential instruments, including counter-cyclical ones, should be agreed at international level first, and can only be introduced after a careful assessment that the already introduced measures (such as capital requirement and bilateral margins) are not sufficient to limit the leverage in the system. Only subject to these two conditions can it be considered whether additional macro-prudential instruments would still be needed.
The European Securities and Markets Authority (ESMA) has issued today a report (also attached below) on securities financing transactions (SFTs), leverage and pro-cyclicality in the EU’s financial markets. ESMA’s report assesses whether the use of SFTs leads to the build-up of leverage which is not yet addressed by existing regulation, how to tackle such build-up, and whether there is a need to take further measures to reduce its pro-cyclicality.
SFTs allow market participants to access secured financing. SFTs involve the temporary exchange of cash against securities, or securities against other securities – such as securities lending, repurchase transactions, buy-sell/ sell-buy back transactions, or margin lending transactions.