Shearman & Sterling LLP | FinReg | European Securities and Markets Authority Publishes Research Report on EU Securities Financing Transactions and Haircuts
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  • European Securities and Markets Authority Publishes Research Report on EU Securities Financing Transactions and Haircuts
    03/27/2017
    The European Securities and Markets Authority has published a research Report on securities financing transactions in the European Union and the use of collateral haircuts by firms. The purpose of ESMA's research is to outline the current level and calculation methodologies of haircuts used in the EU by SFT market participants with the overall aim of informing future discussions in the context of global regulatory policy. SFTs involve the use of securities to borrow cash or other higher investment-grade securities, or vice versa. Such transactions can include repurchase transactions, securities lending and sell/buy backs. ESMA notes that SFTs are an essential element of the EU financial system as they provide one of the main sources of liquidity and high-quality collateral and that the value of collateral used in SFTs in the EU markets amounts to several trillions of Euros. To cover for risks relating to the characteristics of the collateral and counterparty risk, a discount (haircut) is usually applied to the value of collateral. ESMA considers that these can contribute to procyclicality and financial instability by reinforcing asset price movements. Detailed data on haircuts is sparse and little is currently known of market practices. While regulators' analysis of the risks in SFT markets are hampered by the lack of granular data, ESMA concludes that better data will be provided once the reporting obligations under the SFT Regulation enter into force in 2018.

    View the Report.