EU moves on shadow bank­ing trades to rein in risk

The Pak Banker - - COMPANIES/BOSS -

Euro­pean reg­u­la­tors are step­ping up ef­forts to bring trans­parency to shadow bank­ing. Banks and as­set man­agers that lend stocks and bonds in re­turn for cash will be ex­pected to re­port in­for­ma­tion on the short­term trans­ac­tions to data­bases in­tended to help au­thor­i­ties spot risks, the Euro­pean Se­cu­ri­ties and Mar­kets Au­thor­ity said Fri­day in a dis­cus­sion pa­per.

The regulation, "re­sponds to the need to en­hance the trans­parency of se­cu­ri­ties fi­nanc­ing mar­kets and thus of the fi­nan­cial sys­tem," ESMA, which ex­pects to com­plete fi­nal rules by Jan­uary, said in the pa­per.

The doc­u­ment, which is open to com­ment from the in­dus­try, lays out pos­si­ble re­port­ing stan­dards for trade repos­i­to­ries ac­cept­ing in­for­ma­tion about deals such as the multi-tril­lion dol­lar mar­ket in re­pur­chase agree­ments. Traders could be ex­pected to re­port the type and qual­ity of col­lat­eral used in trans­ac­tions and whether it has been reused to back­stop ad­di­tional trades.

Global reg­u­la­tors moved to bol­ster over­sight of so-called shadow bank­ing ac­tiv­i­ties af­ter the 2008 credit cri­sis, when se­cu­ri­ties lend­ing trans­ac­tions al­lowed lev­er­age to build up in the in­dus­try. This went largely unchecked by au­thor­i­ties be­cause the deals took place out­side the tra­di­tional bank­ing sys­tem.

Se­cu­ri­ties fi­nanc­ing trans­ac­tions in­clude trades such as lend­ing or bor­row­ing stocks and bonds as well as re­pur­chase agree­ments, in which as­sets can be pledged for short-term cash loans. In Europe, there were €5.6 tril­lion (Dh22.8 tril­lion, $6.2 tril­lion) in out­stand­ing repo con­tracts on the books of 65 firms at the end of 2014, ac­cord­ing to the lat­est sur­vey from the In­ter­na­tional Cap­i­tal Mar­ket As­so­ci­a­tion.

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