The European Securities and Markets Authority (ESMA) has published a report that it is required to publish under Article 29(3) of the Securities Financing Transaction Regulation that assesses:

• whether the use of securities financing transactions (SFTs) leads to the build-up of significant leverage that is not addressed by existing regulation;
• where appropriate, the options available to tackle such a build-up;
• whether further measures to reduce the pro-cyclicality of that leverage are required; and
• the quantitative impact of relevant recommendations produced by the Financial Stability Board (FSB).

ESMA’s report was prepared in cooperation with the European Banking Authority and the European Systemic Risk Board. The report recommends that:

• the FSB qualitative standards on the methodology used to calculate haircuts in non-centrally cleared SFTs should be introduced as a first step to improve the transparency and stability of haircuts, and the resilience of financial institutions;
• the procyclicality of collateral haircuts used by central counterparties should be addressed in the context of the review of the European Market Infrastructure Regulation;
• numerical haircut floors for non-centrally cleared transactions, such as those set out by the FSB, can only be introduced and calibrated following a thorough analysis using granular SFT data (which will become available after the full implementation of the SFTR), and following careful assessment of the scope, considering in particular the size and relevance of EU government bond markets; and
• other macro-prudential instruments, including counter-cyclical ones, should be agreed at international level first, and can only be introduced after a careful assessment that the already introduced measures (such as capital requirement and bilateral margins) are not sufficient to limit the leverage in the system. Only subject to these two conditions can it be considered whether additional macro-prudential instruments would still be needed.

ESMA states that it stands ready to participate constructively in any potential future discussions around SFT policy instruments. ESMA will continue to monitor the market developments while remaining flexible, should earlier implementation of the FSB numerical haircut floors be required.

View ESMA reports on shadow banking, leverage and pro-cyclicality, 4 October 2016