On 26 January 2021, the Basel Committee for Banking Supervision (BCBS) published a consultation with regards to two technical amendments to the standards on minimum haircut floors for securities financing transactions (SFTs). The technical amendments seek to address an interpretative issue relating to collateral upgrade transactions, and to correct for a misstatement of the formula used to calculate haircut floors for netting sets of SFTs.
On 16 March 2021, the European Banking Authority (EBA) also announced that it will change the Basel III monitoring exercise from a voluntary nature to a mandatory requirement by December 2021, to ensure wider jurisdictions are following the standards, and thus more credit institutions will be required to comply.
ISLA, jointly with ICMA, have submitted a response to the BCBS consultation, and although the memberships approved the technical amendments proposed, they have taken this opportunity to advocate more broadly around the scope of the new rules, requesting an exclusion for securities lending activity from the standards outlined in CRE56, which refers to minimum haircut thresholds.
In their response, the joint associations wrote: “The most frequent motives for a bank to borrow securities are to source superior collateral to improve their liquidity position, for example through a collateral upgrade, as well as to facilitate client short sale transactions. Current market practice within the industry is for the party that is initiating the borrow, to pay the haircut on the collateral delivered.
“The haircut is not determined by the relative asset quality of the two legs, or credit worthiness of the two parties. The framework should make clear that it is applicable to the party receiving the collateral and hence the party determining the haircut, and not the collateral provider, who as the haircut payer, will always fail to meet the minimum haircut threshold.”
Exclusion of the haircut payer in securities borrow transactions should be independent of:
a) the type of collateral posted to the lender (non-cash securities or cash);
b) whether the lender can re-pledge or re-sell the securities collateral received respectively; and
c) how any cash collateral received is re-invested by the lender.