The Financial Stability Board (FSB) published a letter from its chair, Klaas Knot, to G20 Leaders warning of ongoing vulnerabilities within the global financial system, illustrated by recent episodes of market turmoil and the failure of several banks and non-banks in recent years.
The letter stresses the importance of effective implementation of the FSB’s policies, emphasizing that authorities must not only put policies into national laws and regulations, but also build the capacity to operationalize them. It was delivered to G20 leaders along with the FSB’s annual report.
In the report, the FSB provided an overview of the implementation of policy recommendations on securities financing transactions. To address financial stability risks from SFTs such as repo and securities lending, the FSB published 18 updated policy recommendations. The recommendations covered three broad areas:
(i) regulatory reporting and market transparency, including the global collection of granular SFT data and aggregation through the FSB, financial institutions’ public disclosures of SFT activities, and SFT reporting requirements for fund managers to end-investors;
(ii) regulatory requirements such as minimum standards for cash collateral reinvestment, principles for regulations governing the rehypothecation of client assets, minimum regulatory standards for collateral valuation and management, and minimum haircut standards for non-centrally cleared SFTs (including numerical haircut floors); and
(iii) structural aspects such as the evaluation of the possible introduction of central clearing for interdealer repos.
The objective of global SFT data collection and aggregation is to help authorities identify global trends and risks in SFT markets in a timely manner. Implementation of these recommendations remains behind schedule with only one jurisdiction fully complying (India), 14 partially complying and nine not complying. The technical and governance work within the FSB and BIS for global SFT data collection and aggregation has been completed, and reporting of aggregated national data has started.
However, implementation by most jurisdictions has been slow mainly due to operational and technical issues (e.g. data availability and information technology systems) and legal (e.g. data confidentiality) challenges.
Implementation of the other SFT recommendations is still incomplete and continues to face significant delays in most jurisdictions, with generally little progress over the past year. Some of these delays stem from the delayed implementation of the final Basel III framework, given that the minimum haircut standards on bank to non-bank SFTs were incorporated into banking regulation as part of Basel III. The FSB similarly adjusted implementation timelines for its recommendations related to minimum haircut standards.
In other cases, however, jurisdictions report that the cost of implementing some of the relevant FSB recommendations exceeds the benefits, given the size and characteristics of their domestic SFT market, or that a major challenge in implementation relates to level playing field concerns because some jurisdictions have deferred implementation of the haircut floors for several years.
Notwithstanding limited implementation progress, the potential risks to financial stability from SFTs continues to be an area of focus for the FSB. These risks, which the FSB policy recommendations aim to address, stem from the procyclical build-up of leverage and of liquidity and maturity mismatches by entities in the non-bank financial intermediation (NBFI) sector through the use of SFTs.
The annual report covered numerous other aspects of emerging risks, such as digitalization and climate change.