ISLA’s response to the European Commission’s consultation on the finalisation of Basel III identified a need to clarify the scope of minimum haircuts, and warned against making the application too complex that liquidity is driven from the market.
“ISLA understands the intent of the proposals to regulate levels of haircut applied to non-centrally cleared SFT’s, but remains unconvinced that haircut levels were a material contributor to the financial crisis,” the Association wrote in a letter to the EC.
While broadly accepting the proposals, ISLA noted that further clarification should be provided in respect of the scope and application of the proposals.
“Members have expressed concerns that complex rules may deter some entities, specifically the asset lenders, from participating in SFT’s which, for many, remain optional and are still considered a value-adding practice rather than a core requirement.”
ISLA added that the withdrawal of these important finance and collateral liquidity providers may have a detrimental impact on market efficiency.
“We therefore believe it is important to distinguish between the entity providing the financing or collateral liquidity, and the entity receiving it.”