A report from the Financial Stability Board (FSB) released Friday details the risks it sees arising from the securities lending and repo markets.
The FSB is examining the regulation of securities financing markets from a financial stability perspective as part of its wider work on regulatory reform for the shadow banking sector. It aims to issue reform recommendations by the end of 2012, and the report published today is preliminary to its work to develop policy recommendations in this area.
The report identifies seven issues arising from the securities financing markets that might pose risks to financial stability including: a lack of transparency; procyclicality of system leverage and interconnectedness; the potential for collateral re-use to have destabilising effects on the financial system; potential risks arising from a fire-sale of collateral assets; potential risks arising from agent lender practices in handling customer assets and offering indemnities; insufficient rigour in collateral valuation and management practices; and, the fact that by reinvesting cash collateral received from securities lending transactions, securities lenders can effectively perform ‘bank-like’ activities that involve maturity/liquidity transformation and leverage.
The FSB is seeking comments on the report by May 25.