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To date we have seen four broad areas of regulatory developments in the area of shadow banking, with lawmakers focused on bank exposures to shadow banking; money market and other funds; repo and securities financing; and securitisation.
Relationships between banks and shadow banks
When it comes to regulations aimed at restricting banks’ exposure to shadow banks, we have already seen increased capital requirements and large exposure limits. Rules are in progress to deal with requirements for bank investments in funds, and we expect to see restrictions on the provision of liquidity to shadow banks.
Money market funds
Regulation of money market and other funds has already been tightened through the CESR Guidelines and SEC Rule 2a-7, and the European Commission proposed regulation of money market funds, along with new SEC rules, are in progress.
Repo and securities financing
Here, new regulations are yet to come into force, but the Financial Stability Board’s (FSB) proposals include a restriction on reinvestment of collateral and minimum haircuts, with liquidity and capital requirements for all and the restricted use of client assets by non-banks on the horizon.
Securitisation
One of the largest areas of shadow banking is securitisation, and transparency rules and EU risk retention requirements have already been introduced to deal with it, with US risk retention requirements in progress. Further down the line we will see restrictions on liquidity mismatches within vehicles, and limits on links between securitisations and banks.
Huw Jenkins, a partner in Clifford Chance’s banking and finance practice, says “if you are a provider of credit or a provider of liquidity, you should have your antennae up and expect to be on the radar of the regulators, even if you’re not being regulated. There is now a lot more certainty about the direction of regulation, and it is not stopping the development of alternative lending platforms.” New regulation has been called for and is being welcomed by market participants in other areas too, such as peer-to-peer lending.