In the US, amendments to SEC Rule 15c3-3, which effects when equities can be posted as collateral, were rumoured to be scheduled for sign-off this year after a sustained lobbying effort, but the COVID-19 pandemic may now scupper those plans at the final hurdle.
Currently, the interpretation of this rule is the largest block to unlocking a tremendous amount of liquidity and supply in the US, as it limits the collateral type posted by borrowers to cash, US treasuries and US agency debt.
It also means that many beneficial owners are unable to meet the growing demand from borrowers to engage in non-cash transactions.
Speaking to SLT in January, Scot Warren, COO at the Chicago-based Options Clearing Corporation, said: 鈥淔or the broker-dealer community, it鈥檚 critically important to effectively manage their assets and regulatory capital requirements. Changing 15c3-3 so that borrowers can post equities as collateral would enable broker-dealers to free up more liquid assets and utilise their inventory of equities to collateralise their borrows.鈥�
The effort to make the much-sought-after changes have been led by the Risk Management Association (RMA) and the Securities Industry and Financial Markets Association and at the RMA鈥檚 annual event in October 2019, the common view was that progress was being made.
Christopher Kunkle, head of agency lending and managing director at BMO and senior figure within the RMA, tells SLT: 鈥淚n the US, we are proactively working towards equities as collateral in securities finance transactions.鈥�
However, he now predicts these plans will have been thrown off-track in the same way many other regulatory timetables have been, as market overseers grapple with maintaining business as normal practices under pandemic-induced lockdown conditions.
The SEC has gone into a 鈥渉igh priority item鈥� methodology within the COVID-19 pandemic, he explains, so 15c3-3 will 鈥減robably not be reviewed during this timeframe鈥�.
The spread of the coronavirus has already caused delays to the first phase of the and , and is still considered a threat to many other go-live dates across global markets.
Further delays will be a blow to those engaged in the lobbying effort and industry stakeholders that have enviously looked at the European regulatory landscape, which has allowed equities to become a much more common form of collateral used.
SLT鈥檚 full conversation with Christopher Kunkle, where he also evaluates the effectiveness of the Federal Reserve鈥檚 efforts to maintain liquidity during last month鈥檚 market turbulence, appeared in the latest issue of .
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