On February 4th, the FSB issued a statement “FSB Chair’s Letter to G20 on Financial Reforms – Finishing the Post-Crisis Agenda and Moving Forward”. There were several interesting areas that are sure to be the FSB’s focus for 2015.
It looks like the FSB will focus on insuring that capital measurements between banks are comparing apples to apples. Over the last year or two there was a lot written on how banks could game the RWA calculations. Two banks with similar books could have very different results. One response was the mandating of a simple, hard to manipulate, leverage ratio in addition to RWA calculations. The rub was that the leverage ratio (and the Supplementary Leverage Ratio, SLR) was binding on balance sheet intensive businesses like securities financing. From the report:
“…Although much of the capital framework is complete and large internationally active banks are on course to meet the new Basel III capital ratios almost four years in advance of the deadline, the consistency and comparability of capital ratios must be improved…”
and
“…(the Basel Committee will) publish measures that address excessive variability in internal-model based approaches to Basel III…”
Looking at TBTF:
“…At the Brisbane Summit, two crucial elements of the policy framework to end too-big-to-fail were agreed: a proposal for a common international standard on the total loss-absorbing capacity that globally systemic banks must have; and an industry agreement that will prevent cross-border derivative contracts from being terminated disruptively in the event of a globally systemic bank entering resolution…”
and
“…FSB members will take measures to promote industry adoption of contractual provisions recognising temporary stays on the close-out of financial contracts when a firm enters resolution…”
We are not really sure why temporary stays on liquidating derivatives contracts counteracts TBTF except perhaps by slowing down the process, it gives some additional time to figure out how to unwind a bank. However long the temporary stay is, it is unlikely to be long enough for regulators to execute Living Wills for complex banks. Hopefully it buys some time to take a breath and access the situation.
The issue of risk management at CCPs got traction in 2014 and will continue in 2015. Are CCPs too big to fail? Most of the focus has been on member default funds and CCPs capital contribution. But this must not divert attention from the real issue: ultimately the risk is driven by the liquidity of the underlying transactions in a fire-sale scenario and controlled by margin risk management.
“…while the use of CCPs for standardised OTC derivatives transactions is reducing systemic risks, we must ensure that CCPs themselves are not too big to fail…”
“…In addition to ensuring the recoverability and resolvability of CCPs, authorities will need to coordinate oversight of CCPs and their main clearing members…”
“…There is a growing concern that current prices of some securities are based on optimistic assumptions about the likely liquidity of those assets in the event of a market correction. Although liquidity has become scarcer as banks have reduced the scale of their trading books, investors are assuming any future sales can be performed in an environment of continuous market liquidity. Such ‘liquidity illusion’ has been reinforced by the growth of assets held in investment funds committed to offering redemptions at very short notice…”
Trade reporting will finally get resolved…hopefully.
“…We now need to make trade reporting truly effective. There currently are significant legal and other blockages to the reporting, sharing and aggregation of key information regarding trades and these must be removed. In some jurisdictions, ministerial action may be required to ensure their removal…CPMI and IOSCO will propose for consultation guidance on the design of a global Unique Transaction Identifier and Unique Product Identifier to aid consistent trade reporting…”
Securities financing was not forgotten. The FSB will work to:
“…Finalise the remaining elements of our regulatory framework for haircuts on securities financing transactions and set out details for monitoring implementation…”
and
”…Complete the development of standards and processes for global securities financing data collection and aggregation, and set a timeline for implementation…”
It will be an interesting year.