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The EU is weighing whether it should limit the length of transaction chains in which traders who receive collateral in turn use the same securities to back separate trades, according to the person, who asked not to be named because the proposals aren’t public. It is also planning measures to make the chains easier to monitor by regulators.
Banks are facing a growing list of demands from regulators to seek out highly liquid assets as authorities move to bolster the resilience of the financial system.
Re-use of collateral is one way that lenders can satisfy the tougher rules, amid warnings from banks that there may not be enough highly liquid securities available to satisfy accumulating requirements from supervisors.
Lenders including UBS AG and HSBC Holdings Plc have warned that plans by global regulators in the Basel Committee on Banking Supervision to set minimum collateral requirements for non-centrally cleared swaps trades will prompt a global liquidity squeeze as banks struggle to locate enough securities to satisfy the standards.
While Basel regulators early this year proposed changes to the draft standards, including some scope for re-using collateral, and a longer phase-in time, lenders have said this doesn’t go far enough to resolve their concerns.
Money market funds such as those used by individuals to park cash and savings, are a major provider of repo financing. In one example of a repo agreement, a money market fund may lend cash to a dealer overnight, with government securities serving as collateral for the loan. The potential consequences of a fall in market liquidity are higher borrowing costs for governments, companies and consumers.
The Commission may give some details on the proposals in a paper on shadow banking on September 4. The report will be published in tandem with a draft law to force money market funds to hold minimum levels of liquid assets, and in some cases, additional cash reserves, the person said.
Shadow banking is a term used by regulators to define activities that fall outside the scope of most financial regulation, and which they believe could be a source of systemic risk. The Commission will draw on international discussions on how the “regulatory framework for securities lending and repos could be improved” in drawing up its proposal, Michel Barnier, the EU’s financial-services chief, said.