The Securities Financing Transitions Regulation (SFTR) has been introduced in the light of the G20’s agenda to address concerns of the build-up of leverage and pro-cyclicality which can be caused by securities transactions.
Article 29(3) of SFTR specifically asks ESMA along with European Banking Authority (EBA) and European Systemic Risk Board (ESRB) to help ESMA assess whether use of SFTs leads to any build-up of leverage that is not covered in the text of SFTR, whether there are any measures available to tackle such build-up, and if there are any other measures to tackle procyclicality of leverage. The findings of the assessment were published on 30 September.
The report states that a full analysis is not possible due to lack of granular enough data at the EU level, which means that a thorough examination of effects of the recent regulatory changes, most notably EMIR, CRR and CRD, is not yet possible. This was echoed by several ESRB members by stating that full investigation is hindered because of ongoing implementation processes affecting SFTs data.
Nevertheless, ESBR’s opinion to the report and ESMA’s report itself provide us with some conclusions, at time diverging, that are set against the background of the Financial Stability Board’s (FSB) recommendations for haircuts and non-centrally cleared SFTs.
- ESMA encourages the FSB’s methodology used in calculating haircuts in non-centrally cleared SFTs to be introduced
- Haircut floors non-centrally cleared should be introduced after a full implementation of SFTR, as these would require an in-depth analysis of scope, size and relevance of EU government bond market, which is not possible without granular data that SFTR-compliance is meant to provide
- Collateral haircuts used by Central Clearing Parties and it procyclicality should be addressed in the context of EMIR review
- Any counter-cyclicality measures need to be agreed first at an international level. Additionally, an assessment of any existing macroprudential measures, such as capital requirements, is needed in order to verify whether they are sufficient in limiting of a build-up of leverage.
- The level of haircuts in SFTs Is not regulated by existing regulation. Even though EMIR addresses centrally cleared transactions, haircut levels set in the circumstances of low volatility do not fully reflect macroprudential concerns.
- An introduction of the SFB standards into the EU regulatory framework is welcomed as a tool against a build-up of leverage that not yet covered by existing regulatory regimes. However, it was agreed that the implementation of a minimum floor and quantitative margin standard should be kept under review
- Alongside, incentives for central clearing of the derivatives transactions should be promoted. An example of such would be stricter regulation of derivatives which are non-centrally cleared, which do qualify for central clearing.
- Even though the ESRB agrees that implementation of minimum floors for haircut may reduce certain bumps it will not prevent procyclicality completely. The opinion states that the systemic risk is not entirely internalised due to market participants undervaluing risk in good times.
- EMIR rules should be enhanced by providing a less flexible framework for collateral haircut set by CCPs.
What is clear is that there is a consensus between the two entities that haircuts and non-centrally cleared SFTs seem to be the area of potential expansion of the regulation combating leverage and procyclicality. Therefore, both entities support an introduction of FSB standards. Yet, the disagreements seem to appear when evaluating the sufficiency of some of the measures discussed, such as FSB standards and existing macroprudential measures.