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.