Finadium: The Future of Indemnification in Securities Lending

A new briefing from Finadium identifies the major Basel III and Dodd-Frank rules that could affect counterparty default (borrower) indemnification, an important provision for pension plans, mutual funds and others in securities lending programs.

The future of counterparty or borrower default indemnification has been called into question by a series of regulatory initiatives designed to reduce risk in the banking sector. Basel III recommendations on leverage and capital usage could potentially have negative impacts on the practice if accounting for indemnification pushes banks above required ratio levels. In the US, several provisions of Dodd-Frank could constrain indemnification if accounting standards are set unfavorably, or if some parts of securities lending are considered as proprietary trading under the Volcker Rule. While few of these rules have yet to be fully clarified, the potential remains that indemnification could one day soon change from being a free offering included with most securities lending programs to one that is optional or comes with an explicit fee.

Highlights from this briefing include:

– An analysis of specific Basel III and Dodd-Frank provisions that could affect indemnification including the Liquidity Coverage Ratio, Dodd-Frank Rule 165 and the Orderly Liquidation Authority.

– A review of conversations underway that could lessen the impact of indemnification accounting on Basel III capital ratios.

– Up to date information on Volcker Rule provisions that could negatively impact indemnification.

For more information please visit the Finadium website.

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