World Economy

G20 Toughens Rule for Securities Financing

G20 Toughens Rule for Securities FinancingG20 Toughens Rule for Securities Financing

Global regulators are making it more expensive for hedge funds and insurance companies to raise money from loaning shares in a bid to curb hitherto unregulated risks in “shadow banking”.

Securities financing are typically short-term money-raising transactions between banks and other financial institutions, involving the lending and borrowing of shares or the use of repurchase agreements or repos.

The market is worth an estimated $3.9 trillion globally, Reuters reported.

Regulators worry that as banks become tightly controlled by the authorities following the 2007-09 financial crisis, risky financing will shift to the hitherto less regulated “shadow banking” sector made up of hedge funds, insurance companies and other non-banks.

The Financial Stability Board (FSB), which coordinates regulation for the Group of Twenty (G20) economies, published on Monday its new rule for the first global minimum “haircut” or discount on collateral used to back securities financing transactions, toughening up its original draft proposal.

“The regulatory framework for haircuts on securities financing transactions issued by the FSB addresses important sources of leverage and the level of risk-taking in the core funding markets,” FSB Chairman Mark Carney said in a statement.

 Excessive Leverage

From the end of 2017, banks must impose a haircut of at least 6 percent on the collateral they receive from non-banks as “insurance” on the value of securities being loaned. The FSB had originally proposed a minimum haircut of 4 percent.

This means that for every $100 a hedge fund, for example, gets from a securities transaction, the bank must collect collateral worth at least $106.

It is the first hard rule from the FSB on regulating shadow banking as up until now it has only published principles.

It also marks a departure from the past year or more when draft rules from global regulators tended to be watered down as policymakers become more mindful of not wanting to approve rules that risk choking funding to the economy.

Currently, there are no haircuts on many securities financing transactions, meaning there is no safety buffer to cover any drop in the value of the securities loaned.