April 2012

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Shadow Banking has become a new regulatory catch-phrase, driven by continued concerns over the recent financial crisis and a mandate from the G-20 to prevent future disruptions. The Financial Stability Board (FSB), an arm of the G-20, has been tasked with presenting recommendations on managing the risks of Shadow Banking in 2012.

In this report, Finadium provides an analysis of the FSB’s thinking on Shadow Banking for securities lending, repo and money market funds. We investigate the FSB’s documentation, public presentations and relationships with national regulators that are driving conversations. We also compare national regulatory initiatives to FSB discussions to show how the directions taken by one regulator or another are likely to influence global thinking. We conclude with our expectations on realistic actions that the Financial Stability Board and national regulators may take as a result of Shadow Banking investigations.

This report also provides a breakdown of the size of Shadow Banking activity by market actor and product involvement. The FSB has noted that the assets under management of institutions that could potentially participate in Shadow Banking activities is US$60 trillion (Euro 47 trillion). A more granular analysis reduces the AUM of potentially involved institutions to US$33 trillion worldwide; an analysis of the products involved further lowers the size of Shadow Banking to US$17 trillion.

In securities lending, repo and money market funds, the FSB is looking to create a global standard for transparency and risk. Some of the possibilities include moving securities loans onto Central Counterparties (CCPs), requiring banks to retain a percentage of their securitized product issuance, mandating minimum haircuts for repo transactions and creating a Trade Repository for Shadow Banking activities. While the FSB will ultimately produce recommendations, not regulation, the creation of these guidelines will drive global regulatory conversations in these markets for years to come.

This report should be read by market professionals investing or trading in securities lending, repo or money market fund products.

This report is 33 pages with 6 exhibits.

■ Executive Summary

■ Nothing Clears Out or Creates Shadows Like Sunlight

■ Sizing Shadow Banking and Parsing the Data Inputs
– The Market Actor Approach
– The Product Approach

■ Securities Lending and Repo
– Managing Procyclicality
– Cash Collateral Reinvestment Policies
– Ah, Transparency
– To CCP or not to CCP
– Other Best Practices
– Market Feedback on Current Proposals

■ Money Market Funds: Shadow Banks or Asset Managers?

■ The Prospects for Shadow Banking Markets with Greater Regulation

■ About the Author

■ About Finadium


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