The Financial Stability Board (FSB) has amended its previously announced timelines for applying its recommendations on securities financing transactions (SFTs), such as repos, which aim to reduce counterparty risk and address its widespread incidents.
SFT transactions involve transferring certain assets between two parties at a specified price against the delivery of equivalent assets at a specified price on a future date.
The international body, which monitors and makes recommendations about the global financial system, has previously launched its work plan to develop 18 policy tips to address SFTs stability.
Plans for a new framework specifically address margins and haircuts on non-centrally cleared SFTs, which should spark a greater adoption of central clearing.
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Central clearing has remained minimal
The FSB is looking at introducing minimum margins and haircut floors on both centrally cleared and non-centrally cleared derivatives and SFTs. A haircut is the difference between the market value of an asset used as loan collateral and the amount of the loan itself, while margins are a form of insurance that involve a transfer of cash or securities to partially cover exposures.
Specifically, OTC derivatives and other asset classes are now funneled through CCPs, which sit between buyers and sellers in a trade to mitigate the impact of a counterparty default. However, central clearing of securities lending and borrowing arrangements has remained minimal despite the regulators’ efforts.
The initiative follows on the heels of a series of high-profile misconduct cases that came to light in recent years. The FSB identified several areas for further investigation with the aim to prepare a toolkit for supervisors and financial undertakings in these areas.
The statement further explains: “SFTs such as securities lending and repurchase agreements (repos) play a crucial role in supporting price discovery and secondary market liquidity for a wide variety of securities. However, such transactions can also be used to take on leverage as well as maturity and liquidity mismatched exposures, and therefore can pose risks to financial stability.”