ESMA reports on shadow banking, leverage and pro-cyclicality

October 4, 2016

The European Securities and Markets Authority (ESMA) has issued a report on securities financing transactions (SFTs), leverage and pro-cyclicality in the EU’s financial markets. The report assesses (a) whether the use of SFTs leads to the build-up of leverage which is not yet addressed by existing regulation; (b) how to tackle such build-up; and (c) whether there is a need to take further measures to reduce its pro-cyclicality.

While remaining cautious when considering the introduction of new quantitative regulatory requirements on SFTs, ESMA recommends to:

  • Introduce the Financial Stability Board’s (FSB) qualitative standards in the methodology used to calculate haircuts
  • Address the pro-cyclicality of collateral haircuts in central counterparties in the context of the European Market Infrastructure Regulation (EMIR) review
  • Assess the possible extension of the FSB’s scope for numerical haircut floors, and the calibration of these floors using SFTR data which will become available in 2018
  • Assess pro-cyclicality and the potential need for further policy tools once sufficient data becomes available

At this stage, granular supervisory data are lacking, which will only become available once the SFT-Regulation (SFTR) data reporting obligation begins in 2018.

The press release can be found on the ESMA website here.


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