SFT-R compliance and operational readiness (Premium)

Green Business Strategy

The EU’s Securities Finance Transactions Regulation (EU Regulation 2015/2365, or SFT-R) is now officially “live”, as of January 12, 2016. We spoke with European market participants over the last couple of weeks to get an initial take on their readiness to comply with the new requirements.

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Regulators, please note: the focus on Shadow Banking regulation must be on the smart allowance of risk (Premium Content)

businessmen talking on a homemade can phone

The topic of shadow banking has been in the press lately, driven by the Financial Stability Board’s recent annual Shadow Banking monitoring update. This update was nothing if not full of gas and big numbers, but at least they pulled out an important point: some Shadow Banking matters and some doesn’t, so let’s get to the heart of the matter and figure out what’s worth worrying about. Maybe the rest should just stay in banks where it belongs for effective risk management.

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ECB: Report on Financial Structures details structural changes in the euro area financial sector

29 October 2015
  • New ECB report covers banks as well as other financial intermediaries
  • Banks, insurance companies and pension funds in largest euro area economies exposed primarily domestically
  • Consolidation and rationalisation in the banking sector continued in 2014, and the median Tier 1 ratio increased to 14.4% from 13%
  • Insurance companies and pension funds are starting to adjust structurally to low yield environment
  • Shadow banking sector continues to grow mainly on account of an expanding investment fund sector

The European Central Bank has today published the Report on Financial Structures (RFS) 2015. The RFS succeeds the Banking Structures Report (BSR) and covers not only the banking sector, but also other financial intermediaries, such as insurance corporations and pension funds (ICPFs), as well as non-bank and non-insurance financial intermediaries.

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China Securities Finance in the middle of Beijing’s plan to prop up market (Premium Content)

stock market

Chinese government authorities have created a multi-tiered plan to support sharply falling stock prices, including providing liquidity to the China Securities Finance Corporation (CSF). This entity provides margin and securities loans to brokers. By offering more capital to CSF, China hopes to stimulate demand for margin loans. At this point, more froth is needed and CSF will play a role. This article looks at CSF, what it is and how it works.

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Zoltan Pozsar takes the macro view of Shadow Banking (Premium Content)

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One of our favorite thinkers on Shadow Banking, Zoltan Pozsar, has released a new paper on the role of Shadow Banking in financial markets. His previous work focused on the microstructure and mapping of Shadow Banking – who does what and how they do it. This latest piece makes the case that Shadow Banking plays an important part in leveraged bond portfolios, which in turn could create new policy arguments for increasing market liquidity without increasing balance sheet utilization. We review his draft paper published on January 31, 2015.

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We need simple new names for financial market institutions (Premium Content)

businessmen talking on a homemade can phone

We argue for better language to describe various functions in financial markets. There are banks and bank holding companies that offer a wide variety of credit intermediation and agency services. There are nonbanks including hedge funds and asset managers that provide liquidity and offer credit intermediation. Calling something Shadow Banking doesn’t work when we are talking about financial market activities since banks can perform supposedly Shadow Banking activities, and nonbanks like insurance companies and corporates issue funding obligations, like a bank, on a regular basis. The language doesn’t work. We propose here some straight-forward alternatives based on function, not form.

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Where can new banks come from? Today’s Shadow Banks

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The Fed has published a staff report on the emergence of new banks that is sure to confound and distress some market participants. In the report, “Hybrid Intermediaries“, author Nicola Cetorelli argues that some of today’s nonbank intermediaries look very similar to earlier nonbank conglomerates that have become banks post-Lehman. BlackRock in securities lending is cited as an example. The subtext argument here is whether BlackRock and firms like it are SIFIs, should be forced to become bank holding companies, or receive some other form of bank-like regulation.

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FSB releases report on shadow banking — refining metrics and lower risk numbers

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On October 30th the FSB released “Global Shadow Banking Monitoring Report 2014”, their annual examination of the world of shadow banking. Shadow banking is described as “non-bank credit intermediate with bank-like systemic risks…includ[ing] maturity transformation, liquidity transformation, imperfect risk transfer, and leverage…” We take a look at the report.

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IMF Shadow Banking report promotes regulation to balance risk and economic growth

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In October 2014, the International Monetary Fund (IMF) published its Global Financial Stability Report (“the Report”) entitled “Risk Taking, Liquidity, and Shadow Banking: Curbing Excess while Promoting Growth”. The report asserts that global economic recovery is dependent upon “accommodative” monetary policy in advanced economies by way of shadow banking. At the same time, the Report cautions that prolonged accommodation may also encourage excessive financial risk.

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IMF: Risk Taking, Liquidity, and Shadow Banking

The October 2014 Global Financial Stability Report (GFSR) finds that six years after the start of the crisis, the global economic recovery continues to rely heavily on accommodative monetary policies in advanced economies. Monetary accommodation remains critical in supporting the economy by encouraging economic risk taking in the form of increased real spending by households and greater willingness to invest and hire by businesses. However, prolonged monetary ease may also encourage excessive financial risk taking.

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“Financial Stability Monitoring” by the Fed keeps looking for that line between the gold standard of risk management and the desire to let the economy grow

A recently revised staff research report from the Federal Reserve, “Financial Stability Monitoring,” by Tobias Adrian, Daniel Covitz, and Nellie Liang, looks at how risk should be tracked across financial markets. We review both the revised report and a new blog article by the authors.

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Shadow Banking: recent articles and speeches

We’ve seen several recent news articles and commentary on Shadow Banking, from The Economist’s special report to news on China’s CITIC. Below are the most interesting articles we’ve seen lately.

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Regulatory pendulum starting to favor liquidity instead of Shadow Banking restrictions

Following the initial reactions of regulators to protect market stability and dial down risk, we are seeing several points suggesting that the tide is turning: maintaining market liquidity is being looked at more kindly than in the last few years. In particular, we note European suggestions that securitization is really alright and that even Shadow Banking might not be so bad after all.

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The Fed’s Tarullo: ideas for making SFTs safer

The Federal Reserve’s Daniel Tarullo give a speech last Friday called “Shadow Banking and Risk Regulation,” in which he laid out a few new ideas for regulating securities finance transactions (SFTs) including repo and securities lending. Most of the speech was old news for those of us who follow shadow banking but some of the new ideas warrant closer investigation.

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The pendulum eases up on Shadow Banking regulation

After years of careful investigation into the dangers of shadow banking, some regulators appear to be concluding now that the benefits of liquidity provided by credit and maturity transformation may outweigh the inherent risks.

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Hedge fund investment growth picking up from retail and into Shadow Banking

We’ve been thinking lately about hedge fund dynamics, the “other side of the fence,” if you will. Finadium’s next two research reports are surveys of hedge funds on prime brokers, leverage, repo and prime custody, the first of which will be out next week. Today we read an interesting piece from Citi about where new hedge fund growth will come from.

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Helping regulators understand that banks and securities finance are part of the real economy

One theme of the Finadium conference this year was that securities finance is now meeting the world. This idea extends to how regulators view securities lending and repo. A regulatory understanding of these markets is critical not only for regulators to achieve their goals, but also to connect regulatory objectives with impacts for the real world. We think that the dangers of disconnect in some parts of the world is at a real high; the sooner that regulators understand the role that securities finance plays in financial markets and real economies, the better the results of their policy making for banks and real economies.

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Should we buy into ESMA’s arguments on collateral shortages?

ESMA published last week their first Trends, Risk, Vulnerabilities report of the year. The report is worth reading for its data points and a view into the thinking of this important European regulator. We take a look at what ESMA had to say about Shadow Banking and collateral, particularly the prospects of upcoming collateral shortages.

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The Fed’s Daniel Tarullo outlines priorities for 2013

In a speech today before the Committee on Banking, Housing, and Urban Affairs of the U.S. Senate, Federal Reserve Governor Daniel Tarullo will outline key priorities for the Federal Reserve in 2013 including work on Basel III, Dodd-Frank 165 and Shadow Banking. Excerpts from the speech are below.

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The IMF looks at policies for regulating shadow banking

In a December 4 2012 research report, the IMF discussed their views on how to best regulate shadow banking. The paper, “Shadow Banking: Economics and Policy,” has some interesting points that we discuss below. The paper was written by Stijn Claessens, Zoltan Pozsar, Lev Ratnovski, and Manmohan Singh; as far as we can see, Pozsar and Singh are the IMF’s leading thinkers on all things collateral, stability and shadow banking. On a related note, Finadium has the honor of speaking at two events in January 2013 featuring Manmohan Singh.

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What we know about China and Shadow Banking

An interesting speech last week from Marisa Lago, Assistant Secretary for International Markets and Development at the US Treasury, offers the US view on Shadow Banking activity in China. It also highlighted areas where the US Treasury is concerned about China’s financial market evolution. Excerpts from the speech follow, along with our commentary.

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FSB publishes recommendations on seclending and repo

The Financial Stability Board has released its next paper on possible steps for managing risk in the “Shadow Banking” world of securities lending and repo. Some of these recommendations are tame while others have very serious potential implications. We will be providing our analysis on several of these recommendations as the weeks go on. For today however, below are the recommendations themselves.

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Fed’s LSE blog chimes in on why not to lower Interest on Excess Reserves rate; we think they miss the point

On Monday, August 27th the FRBNY Liberty Street Economics blog posted a story entitled “Interest on Excess Reserves and Cash “Parked” at the Fed”. Written by Gaetano Antinolfi and Todd Keister, it basically says that lowering Interest on Excess Reserves (IOER), not unlike what the ECB did recently, won’t really make a difference. Well, in our humble opinion, yes and no.

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