5 Financial services: securities financing
transactions
| (a)
(35780)
6020/14
+ ADD 1
COM(14) 40
(b)
(35829)
6860/14
+ ADDs 1-3
SWD(14) 30
|
Draft Regulation on reporting and transparency of securities financing transactions
Commission Staff Working Document: Impact Assessment accompanying the draft Regulation on structural measures improving the resilience of EU credit institutions and the draft Regulation on reporting and transparency of securities financing transactions
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| Legal base | (a) Article 114 TFEU; co-decision; QMV
(b) —
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| Documents originated | 29 January 2014
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| Deposited in Parliament | (a) 5 February 2014
(b) 3 March 2014
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| Department | HM Treasury
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| Basis of consideration | EM of 26 February 2014
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| Previous Committee Report | None
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| Discussion in Council | Not known
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| Committee's assessment | Politically important
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| Committee's decision | Not cleared, further information requested
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Background
5.1 Shadow banking can be described as non-bank credit
activity conducted by entities that are outside the regulated
system, for example accepting funding with deposit-like characteristics,
performing maturity and/or liquidity transformation, undergoing
credit risk transfer and using direct or indirect financial leverage.
5.2 In March 2012 the Commission published a Green
Paper to launch a consultation on shadow banking, in which it
called for responses, particularly to 15 questions it posed, by
the end of May 2012. We reported the Government's response in
June 2012.[11] In September
the Commission followed up its Green Paper with a Communication
summarising work it had undertaken so far and setting out possible
further actions in this area, including legislative proposals.[12]
The documents
5.3 The Commission presents this draft Regulation,
document (a), aimed at increasing transparency of certain
transactions outside the regulated banking sector. This proposal
complements the Commission's draft Regulation to stop the biggest
banks from engaging in proprietary trading and to give supervisors
the power to require those banks to separate other risky trading
activities from their deposit-taking business.[13]
The purpose of this proposal is to prevent banks from attempting
to circumvent the rules contained within the other draft Regulation
by shifting parts of their activities to the less-regulated shadow
banking sector.
5.4 The draft Regulation provides a set of measures
aiming to enhance regulators' and investors' understanding of
securities financing transactions (SFTs). These transactions have
been a source of contagion, leverage and procyclicality during
the financial crisis and were identified in the Commission's
Communication on shadow banking as needing better monitoring.
The key elements are as follows.
Scope of proposal (Chapter I)
5.5 The Regulation would apply to all counterparties
in SFT markets, investment funds as defined by Directives 2009/65/EC
and 2011/61/EU and any counterparty engaging in rehypothecation.[14]
It would also cover all financial instruments provided as collateral
as listed in Annex I Section C of Directive 2004/39/EC, the Markets
in Financial Instruments Directive (MiFID).
Transparency provisions (Chapters II—V)
5.6 Chapters II — III would create an EU framework
under which all counterparties of a SFT would report the details
of the transaction to trade repositories. This information would
be centrally stored and directly accessible to the relevant authorities,
such as European Securities and Markets Authority (ESMA), the
European Systemic Risk Board and the European System of Central
Banks, for the purpose of identification and monitoring of financial
stability risks entailed by shadow banking activities.
5.7 To ensure investors are aware of the risks associated
with the use of SFTs and other financing structures, Chapter IV
sets out that fund managers should include detailed information
on any recourse they have to these techniques in regular reporting
intervals. An Annex details the information to be provided in
half-yearly and annual reports.
5.8 Chapter V would impose minimum information requirements
on counterparties engaging in rehypothecation. Rehypothecation
would take place only with the express knowledge of inherent risks
and prior consent of the providing counterparty in a contractual
agreement and would be appropriately reflected in the securities
accounts. The counterparty receiving financial instruments as
collateral would be allowed to rehypothecate them only with the
express consent of the providing counterparty and only after having
them transferred to its own account.
Other provisions (Chapters VI—IX)
5.9 Chapter VI sets out the rules for designating
competent authorities, for different purposes, including authorisation,
registration, supervision and enforcement of the measures regarding
reporting of SFTs to trade repositories and engaging in rehypothecation.
Chapter VII would, in order to ensure mutual direct access to
data by the relevant authorities, empower the Commission to conclude
cooperation agreements with relevant third countries. Chapter
VIII concerns administrative sanctions and measures. Chapter IX
would provide that three years after the entry into force of the
Regulation, the Commission should report on the suitability of
the transparency measures and, if appropriate, submit a revised
proposal.
5.10 The Staff Working Document, document (b), is
the Commission's impact assessment together with 14 annexes and
an executive summary, for this draft Regulation and that on structural
measures improving the resilience of EU credit institutions.[15]
The Government's view
5.11 The Financial Secretary to the Treasury (Sajid
Javid) introduces his comments by saying that:
· this SFT proposal is broadly based on
a portion of the recommendations made by the Basel based Financial
Stability Board (FSB);[16]
· in August 2013, the FSB adopted a policy
framework for addressing shadow banking risks in securities lending
and repos, which was subsequently endorsed in September 2013 by
the G20 Leaders; and
· in particular, they welcomed the FSB's
progress in developing policy recommendations for the oversight
and regulation of the shadow banking system, as an important step
in mitigating the potential systemic risks associated with this
market, while recognising that nonbank financial intermediation
can provide an alternative to banks in extending credit to support
the economy.
5.12 The Minister then comments that:
· in order to ensure international convergence,
it will be important that the proposed Regulation is consistent
with the FSB recommendations;
· it will also be important to ensure that
the reporting requirements are proportionate and workable;
· with respect to rehypothecation, and in
particular the requirement for the consent of the providing counterparty,
a too rigid approach could create unintended market disruptions
and the Government will closely consider the drafting of that
provision as it evolves in negotiations;
· any overlaps with existing provisions
(for example through the European Market Infrastructure Regulation
(EMIR)) should be duly taken into account;
· this also applies to the provisions for
relationships with third countries, which will need to be compatible
with the approach taken in other relevant legislation (for example
the EMIR, the Alternative Investment Managers Directive and the
MIFID II);
· the Government also thinks that the use
of delegated and implementing acts and the role of the ESMA, the
European Banking Authority and the European Insurance Occupational
Pensions Authority will need to be carefully scrutinised; and
· there are no direct financial implications
for the Exchequer from the proposal and the additional administrative
costs generated for the ESMA would be covered by fees raised from
the industry with no impact on the EU budget.
5.13 The Minister adds that the Government supports
the objective of increasing transparency of the shadow banking
sector and that as the proposal is taken forward, it will look
for reassurance on these issues and seek to amend the draft Regulation
if it deems it necessary.
5.14 The Minister draws attention to the Commission's
impact assessment, noting that, broadly speaking, the direct impact
on the UK is likely to consist of the benefits that result from
increased transparency at a minimal compliance cost. He says that
more information is included in the Government's own impact assessment
that accompanies his Explanatory Memorandum. Amongst the points
it makes are that:
"The 2007-2009 financial crisis is estimated
to have cost the UK economy as much as £140 billion. Therefore,
even small improvements in financial stability, as expected from
the combined impact of these provisions, can result in material
benefits."
Conclusion
5.15 It appears that, if this proposal is enacted
in the way the Government wishes, it would be useful in making
the securities financing transactions aspect of shadow banking
more transparent. So we look forward to hearing from the Minister
what progress the Government is making in Council working group
discussion on the issues he has mentioned to us. Meanwhile the
documents remain under scrutiny.
11 (33781) 7988/12: see HC 428-lviii (2010-12), chapter
6 (25 April 2012) and HC 86-vi (2012-13), chapter 12 (27 June
2012). Back
12
(35298) 13449/13 + ADDs 1-2: see HC 83-xviii (2013-14), chapter
12 (23 October 2013). Back
13
(35781) 6022/14: see chapter 5 in this Report. Back
14
Rehypothecation is when a counterparty who received financial
instruments as collateral for a transaction, uses those financial
instruments as collateral in a further transaction. Back
15
Op cit. Back
16
For the FSB see https://www.financialstabilityboard.org/index.htm. Back
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