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The Commission Publish Report on FSB Work Streams Under SFTR Article 29

Yesterday the Commission published its report on the FSB workstreams under SFTR Article 29In this report the Commission has recommended to hold off on introducing mandatory minimum haircut floors for non-centrally cleared SFTs. We are delighted to note that many of the recommendations made by the Commission reflect ISLA’s longstanding views in this area . In particular we have felt for some time that prudential capital regimes will act as a natural break on haircut levels and this is the best place to deal with this issue from a regulatory perspective.

The report takes a holistic view of SFT market developments and the effect of regulation, building a case for no further regulatory action to introduce qualitative haircut standards and numerical floors at this stage on the basis that:

  • Cumulative effect of regulation addresses risks – the report considers the impact of regulation impacting SFT markets in a broad manner, concluding that the aims of haircuts to avoid a build-up of leverage and reduce pro-cyclicality have been largely achieved through auxiliary means. Specifically, the report lists: 
    • Bank prudential regulation (especially leverage and liquidity requirements),
    • Restrictions on title transfer collateral arrangements (TTCA) with retail counterparties under MiFID 2/R,
    • Collateral valuation and management standards under UCITS and MMFR, with specific focus on ESMA’s guidelines on haircut policies for ETFs, and
    • Valuation and risk management principles under Solvency II.
  • Evidence suggests haircuts are already applied in the market – The EC finds the need for floors reduced in light of market practices, which already apply haircuts toward the upper end of the spectrum suggested by the FSB in its 2013 and 2015 reports.
  • Scope represents a limited market share – given floors would only apply to non-centrally cleared transactions with non-banks, the scope is estimated to up to 35% and 25% of the securities lending and repo markets, respectively. Especially in light of the trend towards more central clearing, the Commission argues it would appear incongruous to move ahead at this stage.
  • International level playing field concerns – the Commission acknowledges that no other FSB jurisdiction has moved to impose haircut floors and —like the EU— in the early stages of assessing the impact of regulation on SFT markets. In other words, the Commission is wary of placing actors subject to EU requirements at a competitive disadvantage.

The report also contains a broader overview of market developments, noting in particular the effect of ECB lending programmes and broader concerns over collateral scarcity, especially as regards sovereign bonds.

Going forward, the Commission concludes that further assessment of the need for regulatory action will be appropriate once more granular market data is in place through the SFTR reporting obligation – i.e. after mid to late 2019. ESMA is due to report on the added value of qualitative standards and haircut floors on the basis of SFTR data.

Go here to view full report.

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