Nine takeaways from the Clearstream Global Securities Financing conference regulatory panel

Clearstream is holding its 16th annual global securities financing conference in Luxembourg these days with over 800 attendees. Today’s regulatory panel was very interesting, especially the views of regulators that their intrusion in the markets is justified and necessary. Compare that to the opinion of attendees in a real-time poll that government regulation will not only NOT help economic recoveries but is also a waste of time and energy. Below are our takeaways from the panel.

1) Regulators are concerned about Shadow Banking partly defined as maturity transformation trades. However, data from HVB-Unicredit strongly suggests that states are prime users of maturity transformation tools. This means that Shadow Banking regulation is going to affect the very states that regulators represent (they might be able to dodge posting collateral for OTC derivatives but limiting the ability of banks or other financial firms to engage in maturity transformation trades may catch them all the same).

2) Overregulation may come to threaten basic market infrastructure activities. If basic financial transactions become undesirable because of taxation or heavy reporting requirements then banks may decide not to do them. That could cause unexpected damage to national economies.

3) Regulators recognize current activities as intrusive and aim to continue in this direction. We have used the words “intrusive regulation” in a negative context in the past but regulators themselves have embraced it.

4) The regulatory agenda will have deep and long-lasting implications for collateral management.

5) Regulators appear to be aware that new laws create new risks and new winners and losers. That said, while there was direct mention about regulators listening to the market and trying to balance risks, it seemed very strongly that this listening was more of an afterthought and not a primary activity during the regulation drafting period.

6) Regulators are thinking about both credit and liquidity risk at CCPs. This appears to be an upgrade where the main conversations had been about credit only.

7) US regulators appear to favor a CCP model where members are responsible in case of CCP liquidity risk. European regulators favor CCPs having outside lines of credit with non-CCP members to support themselves in case of a crisis.

8) Procyclicality is on the radar screen. Interestingly, one panelist mentioned using the notion of procyclicality to lower margin requirements in a slower economy precisely to speed things up.

9) The Financial Stability Board’s task force on securities lending and repo has five target areas to focus on in 2012, including cash collateral reinvestment rules, transparency for beneficial owners and the appropriate role of CCPs in these markets.

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