ISLA 鈥榰nconvinced鈥� that haircut levels a 鈥榤aterial contributor鈥� to the financial crisis
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ISLA 鈥榰nconvinced鈥� that haircut levels a 鈥榤aterial contributor鈥� to the financial crisis 16 April 2018London Reporter: Maddie Saghir
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The International Securities Lending Association (ISLA) said it was 鈥渦nconvinced that haircut levels were a material contributor to the financial crisis鈥�, in response to the European Commission鈥檚 communication on the finalisation of Basel III.
A key element of the Basel III finalisation are proposals relating to minimum haircut floors for non-centrally cleared financing transactions, which will limit the pro-cyclicality of these transitions and the buildup of excessive leverage in the financial system.
In a letter from ISLA CEO Andrew Dyson in response to the Commission鈥檚 communication, ISLA said that it broadly accepts the proposals, but believes the Commission must 鈥渃larify the scope of the minimum haircuts given their intended objectives鈥�.
Some members expressed concerns over the complex rules, which may deter some entities, including asset lenders, from participating in securities financing transactions (SFTs), according to ISLA.
鈥淭he withdrawal of these important finance and collateral liquidity providers may have a detrimental impact on market efficiency鈥�, ISLA said, 鈥渨e therefore believe it is important to distinguish between the entity providing the financing or collateral liquidity, and the entity receiving it鈥�.
ISLA also explained that the rules needed to recognise the risk of driving finance activity away from prudentially regulated firms where regulatory scrutiny and supervision is more straightforward.
鈥淭he proposals need to be very clearly focused on the provision of financing to non-prudentially regulated firms, provided by firms subject to prudential regulation,鈥� ISLA said.
ISLA added: 鈥淚SLA believes that international alignment of these measures will ensure a globally consistent application and reduce the risks of market fragmentation. The Commission has broadly addressed the FSB recommendations for the mitigation of risk associated with SFTs through the adoption of the Securities 麻豆影视传媒 Transaction Regulation (SFTR).鈥�
It concluded: 鈥淚SLA notes that the Commission has previously recognised that the design and application of minimum haircuts requirements should only proceed once SFTR data can be used to calibrate it.鈥�
鈥淕iven the sensitivities and potential impacts that the application of minimum haircuts may have on finance availability and collateral liquidity, ISLA strongly agrees with the Commission鈥檚 report and believes it would be prudent to utilise the SFTR data to design and calibrate any minimum haircut regime in Europe.鈥�
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