SFT Regulation: ESMA reports on SFTs and leverage in EU financial markets

The Securities Financing Transactions Regulation (SFT Regulation) required that ESMA, in cooperation with the European Banking Authority (EBA) and the European Systemic Risk Board (ESRB), report to the EU Parliament and EU Council on whether the use of SFTs contributes to the build-up of significant leverage not addressed by existing legislation, and whether further measures to reduce the pro-cyclicality of that leverage are required. The ESRB's Opinion to ESMA has been published alongside ESMA's report.

ESMA has found that definitive conclusions on the efficiency of numerical haircut floors on non-centrally cleared SFTs cannot currently be drawn at this early stage, but ESMA expects more data to become available once SFT Regulation data reporting obligations begin in 2018.

ESMA's recommendations include:

• introducing the Financial Stability Board's (FSB's) qualitative standards in the methodology used to calculate haircuts;
• addressing the pro-cyclicality of collateral haircuts in central counterparties (CCPs) in the context of the European Market Infrastructure Regulation (EMIR) review;
• assessing the possible extension of the FSB's scope for numerical haircut floors, in particular to government bonds, and the calibration of these floors using SFT Regulation data which will become available in 2018; and
• assessing pro-cyclicality and the potential need for further policy tools once sufficient data becomes available.