Finadium Research Report

What Basel III Means for Securities Lending and Collateral Management

February 2011

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The Basel Committee on Banking Supervision has now published the main recommendations of Basel III, a sweeping set of reforms and new metrics for supervising the banking industry. Basel III is similar to its predecessor, Basel II, but goes much further in managing the leverage that banks can provide their clients and the liquidity they must maintain. Like any new government regulation, Basel III promises to create new winners, losers and distortions in the market.

Basel III presents a wide array of opportunities and challenges for securities lending and collateral management professionals. From particular exemptions to rules that will affect other parts of the bank to newly proposed risk weightings for central credit counterparties, more attention from Basel III has one conclusive outcome: more transparency is coming to the securities lending and collateral management markets.

This report has been written to provide education on the looming Basel III landscape for professionals in securities lending and collateral management and a synopsis of the macro impacts that Basel III will have on their business activities. It presumes the reader has advance knowledge of the securities lending and collateral management industries and an understanding of the main ideas of credit risk. While most changes to this part of the securities industry will be benign, the report addresses several scenarios that could lead to unwelcome consequences if not addressed proactively, including the accounting treatment of indemnities provided to beneficial owners in securities lending.

This report should be read by securities lending and collateral management professionals, their advisors and their regulators.

This report is 38 pages with 8 exhibits.

■ Executive Summary

■ Introducing Basel III
– Moving from Basel II to Basel III
– Methodology

■ Calculating the Cost of Capital
– Wrong-Way Risk
– Managing Procyclicality

■ Ratios for Liquidity and Funding Management
– The Liquidity Coverage Ratio
– The Net Stable Funding Ratio
– The Leverage Ratio

■ Stress Testing and Risk Modeling

■ Central Credit Counterparties
– Clearing Relationships

■ Further Considerations
– Industry Action in Advance of Increased Transparency
– Short-term Credit Supply

■ Appendix A: Basel II for Securities Lending

■ About the Author

■ About Finadium


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