David Rule mapped out the potential policy options at the ICMA European Repo Council’s (ERC’s) general meeting, ahead of next month’s meeting between the G20 finance ministers and central bankers.
In its interim report on securities lending and repo, published in April, the FSB described some of the financial stability issues it had identified. The question now is what exactly the Board plans to do about these issues.
At the ERC’s general meeting, Rule first discussed market transparency issues. “The first thing we will do in our report is to set out what we, as authorities, would like to know [about repo and securities financing markets],” he said. “How we then get that information is a practical question that can be addressed jointly with market participants.”
The European Central Bank has notably supported the idea of a trade repository for the repo market. According to Rule, the FSB will not seek to duplicate that, but will work with existing initiatives. However, there are difficult issues to sort out.
One is whether the FSB works at the transaction-level and tries to insert reporting into the trade process, or whether it should make institutions report positions to the authorities on a periodic basis.
That, said Rule, is a big decision. There are also practically difficult questions stemming from the fact that the FSB will want to know the type of collateral.
Another issue is improvements in corporate disclosures. The FSB has looked at the accounts of the largest banks and dealers around the world to see what it can find out about their activities in the repo and securities lending markets. “We have found complete lack of consistency and some fairly glaring gaps in what you would want to know if you were a reader of corporate accounts,” said Rule.
Minimum haircuts
Rule also discussed the option of having a requirement underpinning the way market participants use methodology to calculate haircuts. This could take the form of either a certain number of years of data that includes a stress period, or requiring stress testing to be used.
But there are implications in the way that Basel capital requirements are set for banks. “The alternative - and it may be a complement rather than an alternative - is for the regulators to set numerical floors on the haircuts that are used for the markets,” said Rule. “That is being considered very seriously.”
