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Market Based Finance/Shadow Banking

The shadow banking system is a term for the collection of non-bank financial intermediaries that provide services similar to traditional commercial banks, but outside the reach of normal banking regulations. The Financial Stability Board (FSB) which was established in 2009 has taken a prominent role in looking at the strengthening of oversight and regulation of the shadow banking sector in the post-financial crisis era. More specifically, the FSB has done considerable work to address shadow banking risks in securities lending and repo markets.

Based on their initial recommendations to strengthen oversight and regulation of the shadow banking system as set out in its report submitted to the G20 in October 2011, the FSB set up the workstream on securities lending and repo (WS5) to assess financial stability risks and develop policy recommendations to strengthen regulation of these markets.

In November 2012, the FSB published its consultative document A Policy Framework for Addressing Shadow Banking Risks in Securities Lending and Reposwhich identified the financial stability issues (or shadow banking risks) in securities lending and repo markets and set out 13 policy recommendations to address such risks. These included; improvements in regulatory reporting and market transparency, regulation of securities financing, as well as policy recommendations related to structural aspects of the securities financing markets such as central clearing.

ISLA has been an active participant throughout the various deliberations and subsequent recommendations of WS5.

The Securities Finance Transaction Reporting (SFTR) is the implementation vehicle for the FSB’s recommendations here in Europe.

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