Transforming Shadow Banking into Resilient Market-based Finance

On 29 August 2013, the FSB published the report Policy Framework for Addressing Shadow Banking Risks in Securities Lending and Repos (hereafter August 2013 Report) that set out final recommendations to address financial stability risks in relation to securities lending and repos (repurchase agreements).1 These included recommendations for national/regional authorities to improve data collection on securities lending and repo markets to detect financial stability risks and develop policy responses, and for the FSB to aggregate the total national/regional data for these markets in order to assess global trends in financial stability.

Securities financing transactions (SFTs) such as securities lending and repos play a crucial role in supporting price discovery and secondary market liquidity for a variety of securities. They are central to financial intermediaries’ market-making activities as well as to their investment and risk management strategies. However, such transactions can also be used by market participants to take on leverage as well as engage in liquidity and maturity transformation. An enhanced data collection on securities financing markets is needed for authorities to obtain more timely and comprehensive visibility into trends and developments in these markets.

Based on the recommendations in the August 2013 Report, a FSB Data Experts Group (hereafter DEG) was established to develop standards and processes for global data collection and aggregation on SFTs that are relevant for financial stability monitoring and policy responses. Such standards and processes would allow the FSB to collect periodically (at least monthly) from national/regional authorities aggregated data on securities lending, repos, and margin lending based on granular information collected at the national/regional level. The standards and processes also include recommendations for data collection procedures for national/regional authorities that should help minimise potential problems in global aggregates, such as double-counting.

The FSB issued the proposed standards and processes for public consultation on 13 November 2014.3 Consultation responses were received from more than 20 respondents including trade associations representing securities borrowers and lenders, intermediaries in the securities lending and repo markets, asset managers, market infrastructure providers and individuals.

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