REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL under Article 29(3) of Regulation (EU) 2015/2365 of 25 November 2015 on transparency of securities financing transactions and of reuse and amending Regulation (EU) No 648/2012
Date: 2017-10-19
Institutions: Directorate-General for Financial Stability, Financial Services and Capital Markets Union, European Commission
Subjects: administrative transparency, financial control, financial institution, financial legislation, financial transaction, investment company, mortgage, securities, trade information

EN 

   EN 

   EUROPEAN COMMISSION  Brussels, 19.10.2017  COM(2017) 604 final   REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL under Article 29(3) of Regulation (EU) 2015/2365 of 25 November 2015 on transparency of securities financing transactions and of reuse and amending Regulation (EU) No 648/2012  
 
 
REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND 
THE COUNCIL 

under Article 29(3) of Regulation (EU) 2015/2365 of 25 November 2015 on transparency 
of securities financing transactions and of reuse and amending Regulation (EU) No 
648/2012 

1.  INTRODUCTION 

Regulation  (EU)  2015/2365  on  the  transparency  of  securities  financing  transactions  and  of 
reuse (SFTR) aims to get a better understanding of the effects of shadow banking (non-bank 
credit  intermediation)  and  to  address  the  risks  posed  by  securities  financing  transactions 
(SFTs). 

SFTs are secured funding or lending transactions that imply a temporary exchange of assets 
with  one  leg  of  the  transaction  serving  as  a  guarantee  (collateral).  Repurchase  agreements 
(repos) constitute the most important category of SFTs in terms of outstanding amounts and 
turnover. They are generally motivated by the need to borrow cash. From the borrower's point 
of view, the transaction consists of selling securities against cash, while agreeing in advance 
to buy back the securities at a predetermined price. The sold securities serve as collateral for 
the  buyer  (provider  of  cash)  in  the  repo.  Securities  lending,  the  second  largest  category  of 
SFTs,  is  primarily  driven  by  market  demand  for  specific  securities,  e.g.  for  short  selling  or 
settlement  purposes.  In  this  type  of  transaction,  one  counterparty  lends  securities  for  a  fee 
against collateral in the form of cash or other securities given by another counterparty. 

SFTs  allow  banks  and  non-bank  market  participants  to  access  secured  funding/lending  on a 
short  term,  thereby  creating  low-risk  investment  and  financing  opportunities.  Consequently, 
SFTs  are  an  integral  element  of  the  current  financial  ecosystem.  Well-functioning  SFT 
markets are crucial for moving cash and securities between market participants, i.e. financial 
and  non-financial  institutions.  They  also  support  price  discovery  and  secondary  market 
liquidity for a variety of securities and facilitate the implementation of risk management and 
collateral  management  strategies.1  Furthermore,  repo  markets  in  particular  play  an  integral 
role  in  the  monetary  policy  operations  of  European  central  banks.  Nevertheless,  SFTs  can 
allow  the  build-up  of  leverage  and  pro-cyclicality  as  shown  during  the  emergence  of  the 
financial  crisis  in  2007-2008.  SFTs  also  enhance  the  interconnectedness  between  different 
kinds of market participants and can therefore increase the risk of financial contagion. 

At  the  global  level,  the  Financial  Stability  Board  (FSB)  is  responsible  for  identifying  such 
risks  and  developing  recommendations  to  address  them  in  an  internationally  coordinated 
manner.  In  August  2013,  the  FSB  adopted  a  policy  framework2  for  addressing  shadow 
banking  risks  in  securities  lending  and  repos.  The  framework  includes  a  set  of  policy 

1 FSB, Strengthening Oversight and Regulation of Shadow Banking, 29 August 2013 
http://www.fsb.org/2013/08/r_130829c/ 
2 Ibid. 

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recommendations and was endorsed by the G20 Leaders in September 2013. A number of the 
recommendations  aim  at  enhancing  the  transparency  of  SFT  markets  through  frequent  and 
granular regulatory reporting. SFTR responds to these recommendations at EU level. 

In  November  2015,  the  FSB  extended  its  policy  recommendations3  with  a  regulatory 
framework  for  so  called  haircuts  on  non-centrally  cleared  SFTs.  A  haircut  is  a  discount 
applied to the value of collateral provided, in order to account for market risk. Haircuts aim at 
preventing excessive leverage as well as mitigating concentration and default risk.  

2.  PURPOSE OF THE REPORT AND STAKEHOLDER INPUT 

Under Article 29(3) of SFTR, the Commission is required to produce a report "on progress in 
international  efforts  to  mitigate  the  risks  associated  with  SFTs,  including  the  FSB 
recommendations for haircuts on non-centrally cleared SFTs, and on the appropriateness of 
those recommendations for Union markets". 

In order to put the FSB recommendations in context and to respond to a commitment of the 
Commission  in  its  Call  for  Evidence  Communication4,  this  report  will  also  provide  a  brief 
assessment of European SFT markets. 

As required under SFTR, the European Securities and Markets Authority (ESMA) produced a 
report5,  in  cooperation  with  the  European  Banking  Authority  (EBA)  and  the  European 
Systemic Risk Board (ESRB), assessing: 

  whether the use of 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. 

Furthermore,  a  number  of  other  policy  documents  and  contributions  have  been  taken  into 
account for the preparation of this report, in particular the aforementioned FSB documents as 
well as reports from the ESRB67 and the Bank for International Settlements (BIS)8. 

3.  SFT MARKETS 

3.1. FUNCTIONING OF EUROPEAN SFT MARKETS 

3 FSB, Transforming Shadow Banking into Resilient Market-based Finance, 12 November 2015 
http://www.fsb.org/2015/11/regulatory-framework-for-haircuts-on-non-centrally-cleared-securities-financing-
transactions-2/ 
4 COM(2016) 855 final 
5 ESMA, Report on securities financing transactions and leverage in the EU, 4 October 2016 
https://www.esma.europa.eu/press-news/esma-news/esma-reports-shadow-banking-leverage-and-pro-cyclicality 
6 ESRB, Opinion to ESMA on securities financing and leverage, 4 October 2016 
https://www.esrb.europa.eu/pub/pdf/other/20161004_esrbopinion.en.pdf? 
7 ESRB, The macroprudential use of margins and haircuts, 16 February 2017 
https://www.esrb.europa.eu/pub/pdf/reports/170216_macroprudential_use_of_margins_and_haircuts.en.pdf?811
5a0e7c89b631df250abdcf9ad008a 
8 BIS, CGFS Papers No 59 Repo market functioning, 12 April 2017 https://www.bis.org/publ/cgfs59.pdf 

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SFT  markets  play  an  essential  role  in  today's  financial  system  by  supporting  market 
participants  in  their  secured  funding  and  collateralisation  needs.  Repos  are  particularly 
important  for  the  functioning  of  interbank  markets,  offering  an  alternative  to  unsecured 
interbank lending and time deposit, to cover reserve requirements and manage liquidity needs.  

The importance of mitigating counterparty risk has increased since the financial crisis, leading 
to a growing demand for collateral by market participants. Hence, there has been strong shift 
from unsecured to secured lending markets. Turnover of the secured lending market was 10 
times higher than that of unsecured lending in 2015, compared to a factor of 1.6 still in 2008.9 
In  terms  of  market  volume,  outstanding  amounts  on  European  repo  markets  were  EUR  5.6 
trillion, corresponding to roughly 13% of EU banks' total assets or 25% of outstanding euro-
denominated bonds and listed shares.10 

Repos  not  only  help  obtain  secured  funding.  Institutional  investors  and  non-financial 
counterparties tap repo markets to store cash and earn an interest. Moreover, banks and non-
bank  market  participants  often  seek  to  obtain  securities  that  can  be  used  as  collateral  to 
support financial transactions beyond cash borrowing / lending. This can be achieved through 
reverse repos, which imply a genuine sale and re-sale of financial assets, or securities lending 
transactions,  another  important  class  of  SFTs.  SFTs  have  long  been  used  as  a  source  of 
securities,  e.g.  to  undertake  short  selling.  Increased  collateralisation  of  over-the-counter 
(OTC) derivatives transactions, including the shift to central counterparty (CCP) clearing, has 
tied the use of OTC derivative contracts more closely to the availability of collateral. Market 
participants entering into OTC derivatives transactions will often repo out securities to obtain 
cash to meet their margin requirements, while CCPs may make use of reverse repos to store 
cash collateral, resulting in additional demand on both sides of the repo market. 

More  recently,  significant  changes  have  been  observed  in  repo  markets.  The  demand  for 
securities as collateral has significantly increased while, according to stakeholders, the supply 
in  high-quality  collateral  has  tightened,  at  least  during  certain  periods.  This  has  become 
evident  in  higher  outstanding  amounts  of  reverse  repos  than  normal  repos  and  notably  in 
higher premiums for special collateral.11   

The  sovereign  debt  crisis  may  have  affected  the  supply  of  assets  because  of  the  credit 
deterioration  of  certain  government  bonds,  which  market  participants  no  longer  consider  as 
high  quality  collateral.  Market  participants  also  perceive  the  ESCB's  asset  purchase 
programme, in particular of government bonds, as contributing to a shortage of high quality 
collateral and to the low cost of EUR funding relative to USD funding. The latter may have an 
indirect effect on the demand for securities by making it profitable to swap USD for EUR, and 
investing the proceeds in EUR-denominated assets. Market positioning at a specific point in 
time matters too: an increase in short positions also raises demand for securities. 

9 ECB money market survey 
https://www.ecb.europa.eu/stats/financial_markets_and_interest_rates/money_market/html/index.en.html 
10 ICMA market survey https://www.icmagroup.org/assets/documents/Market-Info/Repo-Market-Surveys/No.-
32-December-2016/RepoSurvey-140217.pdf 
11 Ibid. 

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Moreover, stakeholders claim that in addition to macroeconomic policy, regulation may have 
had an impact on activity on collateral markets as well. Beyond central clearing requirements 
which led to a general increase in the demand for collateral, Basel III is noted frequently by 
market participants as transforming and reshaping the structure and dynamics of repo markets. 
The  leverage  ratio,  risk  capital  requirements,  liquid  coverage  ratio,  and  net  stable  funding 
ratio  are  regarded  to  have  a  cumulative  impact  on  liquidity  in  repo  markets.  Each  of  these 
components is seen to place constraints on or increase the cost of repo activity.  

Signs of tensions in repo markets have recently become apparent especially around regulatory 
reporting dates: some financial institutions reduced temporarily or withdrew from activity on 
repo markets at 2016 year end and to a more limited extent at quarter ends. In some cases, the 
shortfalls in supply of high quality collateral, though anticipated by market participants, were 
so pronounced that they led to sharp increases in the premium on scarce collateral at specific 
dates.  Whether  this  had  an  impact  on  wider  bond  market  prices  and  liquidity  is  difficult  to 
establish, so far it seems the effect was very limited and short-lived. 

3.2. LEVERAGE AND OPTIONS TO TACKLE ITS BUILD-UP 

By  facilitating  credit  growth,  SFTs  create  leverage12  beyond  the  banking  system  with  its 
prudential regulation. Furthermore, the reinvestment of cash collateral and the re-use of non-
cash collateral potentially enables market participants to recursively leverage their positions.13 
In  some  situations,  this  could  lead  to  a  build-up  of  excessive  leverage  which  in  turn  could 
pose a risk to financial stability, in particular due to the implicit procyclical effects: Generally, 
leverage contributes to balance sheet growth during strong economic phases and deleveraging 
pressure during economic downswings.14 

The specific contribution of SFTs to the build-up of leverage is difficult to assess due to a lack 
of granular data (e.g. the volume of margin lending transactions, data on the reinvestment and 
reuse of collateral) and the potentially different purposes for which SFTs are undertaken. The 
transaction-level  reporting  obligation  introduced  with  SFTR  will  enable  authorities  to 
generate this data in the future and better analyse the implications of SFTs in terms of creating 
leverage.  

When  it  comes  to  tackling  the  build-up  of  leverage,  it  should  first  be  noted  that  different 
measures of leverage exist. For example, the differences between gross and net leverage are 
relevant to understand the implications of leverage for financial stability. Work is ongoing in 
this area to develop consistent measures of leverage across jurisdictions and sectors.15 

A  number  of  elements  in  the  EU  regulatory  financial  services  framework  aim  at  limiting 
leverage  and  procyclicality.  This  applies  especially  in  the  banking  sector  with  its  Basel  III 
framework16 even if some of the measures under this framework have only been introduced 

12 Leverage refers to the use of borrowed funds for the purchase of assets. 
13 ESRB (2016), p.5 
14 ESMA (2016), p.48 
15 ESMA (2016), p.49 
16 ESMA (2016), p.25, mentions a number of instruments implemented under the Basel III framework through 
the  Capital  Requirements  Directive  (Directive (EU) No 2013/36  -  CRD)  and  Regulation  (Regulation  (EU)  No 

5 

 
 
                                                            
recently  and  are  not  fully  implemented  yet.  Certain  measures  and  requirements  with  the 
objective  to  address  leverage  also  apply  to  insurance  companies,  central  counterparties 
(CCPs) and investment funds. There are currently no EU-wide instruments that aim at curbing 
the build-up of leverage across all financial sectors. 

Beyond  the  sectoral  measures  mentioned  above,  margins  and  haircuts  can,  in  the  specific 
context of SFTs, be suitable tools to limit the build-up of leverage and especially the recursive 
application  of  leverage.  The  FSB  has  issued  recommendations  with  respect  to  collateral 
haircuts which are covered in more detail later in the report (see 4.6). 

While the setting of haircuts can constrain the build-up of leverage, the practice in itself may 
potentially  generate  procyclical  effects.  In  periods  of  upswing,  market  participants  may 
decrease haircut levels as they expect lower collateral liquidation risk. In downturn periods, 
market participants could tend to increase haircuts to account for higher expected volatility in 
collateral  liquidation.17  However,  at  this  stage,  there  is  no  clear  evidence  how  and  to  what 
extent such haircut movements affect asset prices, leverage and financial cycles.18 

4.  INTERNATIONAL EFFORTS TO MITIGATE SFT RISKS 

4.1. BACKGROUND 

In  August  201319  and  November  201520,  the  FSB  published  reports  that  set  out 
recommendations  for  addressing  financial  stability  risks  in  relation  to  SFTs.  These 
recommendations broadly aim at: 

  enhancing  the  transparency  of  securities  financing  markets  via  frequent  and  granular 

 
 
 
 

regulatory reporting and disclosure; 
introducing regulatory standards for cash collateral reinvestment;  
introducing principles for the re-hypothecation of client assets; 
introducing regulatory standards for collateral valuation / management; and 
introducing  qualitative  standards  for  methodologies  to  calculate  collateral  haircuts  and 
implementing a framework for numerical haircut floors. 

The  following  sections  briefly  describe  the  recommendations  and  assess  their  state  of 
implementation  both  at  EU  and  international  level.  Possible  ways  forward  are  suggested, 
where appropriate. 

4.2. TRANSPARENCY OF SFT MARKETS (FSB RECOMMENDATIONS 1-5) 

2013  /  575  –  CRR).  These  measures  include  higher  requirements  for  loss  absorption  and  high  quality  capital; 
stronger  capital  requirements  for  counterparty  credit  risk  exposures  arising  from  derivatives  and  SFTs;  the 
introduction  of  the  Leverage  Ratio  (LR),  Liquidity  Coverage  Ratio  (LCR)  and  Net  Stable  Funding  Ratio 
(NSFR); and better risk-management, governance and compensation structures. 
17 ESRB (2016), p.10  
18 ESRB (2017), p.35 
19 FSB (2013) 
20 FSB (2015) 

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Authorities  should  be  enabled  to  capture  comprehensive  and  timely  information  on  SFT 
exposures  between  financial  institutions,  including  on  the  composition  and  evolution  of  the 
underlying collateral. For that purpose, SFT trade-level and position data should be gathered 
frequently  and  with  a  high  level  of  granularity.  Consistency  in  the  data  gathering  process 
through  the  definition  and  application  of  standards  should  enable  the  regional  and  global 
aggregation  of  the  collected  data.  Finally,  since  SFTs  are  used  extensively  by  investment 
funds, managers of such funds should be required to report appropriate information on SFT 
activities to their end-investors. 

SFTR,  which  was  adopted  in  November  2015,  responds  to  these  recommendations.  It  has 
three main elements: 

  Requirements for counterparties to SFTs to report all SFTs to central trade repositories; 
  Requirements for investment funds to disclose the use of SFTs to investors in their regular 

reports and pre-contractual documents; 

  Minimum transparency conditions for the reuse of collateral received in a SFT, such as the 
disclosure  of  the  resulting  risks  and  consequences  as  well  as  prior  consent  by  the 
counterparty providing collateral (addresses FSB recommendation 7 on re-hypothecation, 
see 4.4). 

SFTR  fully  addresses  the  FSB  recommendations  on  transparency.  The  position  and  trade-
level data to be reported under SFTR is also in line with the FSB requirements. The European 
Securities and Markets Authority (ESMA), responsible for developing the technical standards 
for the implementation of SFTR, took the FSB work into account and included the required 
data elements in the proposed reporting framework. The Commission and ESMA continue to 
cooperate  closely  with  the  FSB,  and  the  FSB's  work  is  taken  into  account  in  the  current 
finalisation  of  SFTR's  implementing  measures.  Actual  reporting  is  expected  to  start  as  of 
2019.  The  Commission  will  assess  the  effectiveness  of  SFTR,  two  years  after  the  start  of 
reporting. 

4.3. CASH COLLATERAL REINVESTMENT (FSB RECOMMENDATION 6) 

Authorities responsible for non-bank entities engaging in securities lending (principal lenders 
and  lending  agents)  should  implement  regulatory  regimes  in  their  jurisdictions  which  meet 
FSB minimum standards for cash collateral reinvestment to limit liquidity risks arising from 
such activities. The minimum standards contain high level principles and measures addressing 
liquidity risk, maturity transformation, as well as concentration and credit risk.  

In  August  2014,  ESMA  adopted  Guidelines  on  ETFs  and  other  UCITS  (Undertakings  for 
Collective  Investment  in  Transferable  Securities)  issues21  providing  rules  for  cash  collateral 
reinvestment by UCITS asset managers that engaging in securities lending transactions.  The 
rules address liquidity, valuation, diversification, eligibility, correlation and other criteria for 
re-invested cash collateral. While the guidelines are not mandatory, competent authorities and 

21 https://www.esma.europa.eu/sites/default/files/library/2015/11/esma-2014-0011-01-00_en_0.pdf 

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financial  market  participants  must  make  every  effort  to  comply  with  those  guidelines  and 
recommendations or explain why they do not intend to comply with them. 

Furthermore, the EU Regulation on money market funds (MMF)22 specifically prohibits such 
funds to enter into securities lending agreements. 

4.4. RE-HYPOTHECATION

23

 OF CLIENT ASSETS (FSB RECOMMENDATIONS 7 AND 8) 

The  FSB  made  several  recommendations  in  relation  to  the  rehypothecation  of  client  assets. 
First, financial intermediaries should provide sufficient disclosure to clients in relation to the 
re-hypothecation of their assets so that clients can understand their exposures in the event of a 
failure of the intermediary. Second, client assets may be re-hypothecated by an intermediary 
for the purpose of financing client long positions and covering short positions, but they should 
not be re-hypothecated for the purpose of financing the intermediary’s own-account activities. 
Third,  only  entities  subject  to  adequate  regulation  of  liquidity  risk  should  be  allowed  to 
engage in the re-hypothecation of client assets.   

As  regards  disclosures  to  clients,  Article  15  of  SFTR  stipulates  that  the  right  to  reuse 
collateral  is  subject  to  informing  the  collateral  provider  of  the  risks  and  consequences  that 
may  be  involved  in  granting  the  right  of  use  of  collateral.  Furthermore,  the  right  to  reuse 
collateral is subject to the collateral provider granting prior express consent. 

Concerning  the  use  of  client  assets  for  own  account  activities,  MiFID  I24  provides  that 
investment  firms  and  credit  institutions  must  safeguard  the  ownership  rights  of  clients  and 
prevent the use of a client instrument on own account except with the client’s express consent. 
These requirements will be further strengthened as of January 2018 under MiFID II25 which 
prohibits  the  conclusion  of  title  transfer  collateral  arrangements  (TTCA)  with  retail  clients 
and  imposes  conditions  on  concluding  TTCA  with  professional  clients,  in  particular 
highlighting  the risks involved and the effect on the client’s financial instruments and funds. 
Finally, as regards UCITS, the ESMA Guidelines on ETFs and other UCITS issues and the 
MMF Regulation provide that non-cash collateral received should not be sold, re-invested or 
pledged.  

The  financial  institutions  (i.e.  investment  firms  and  credit  institutions)  allowed  to  re-
hypothecate  client  assets  under  the  conditions  described  above  are  in  any  event  subject  to 
regulation of liquidity risk under the capital requirements framework of the EU. 

4.5. COLLATERAL VALUATION AND MANAGEMENT (FSB RECOMMENDATION 9) 

SFT  counterparties  receiving  collateral  should  only  take  collateral  types  that  -  following  a 
counterparty failure - they are able to hold for a period without breaching laws or regulations, 

22 Regulation (EU) 2017/1131 of 14 June 2017 
23 In the terminology of the FSB, 'reuse' is defined as any use of securities delivered in one transaction in order to 
collateralise another transaction. 'Re-hypothecation' is more narrowly defined as the reuse of client assets. 
24 Market in Financial Instruments Directive 2004/39/EC of 21 April 2004 
25 Directive 2014/65/EU of 15 May 2014 

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value and risk manage appropriately. They should also have contingency plans for the failure 
of their largest market counterparties, including in times of market stress. 

Collateral and lent securities should be marked to market at least daily and variation margin 
collected at least daily where amounts exceed a minimum acceptable threshold. 

Minimum regulatory standards for collateral valuation and management have been introduced 
for  UCITS  and  MMF,  certain  credit  institutions  and  investment  firms  as  well  as  insurance 
companies and occupational pension funds. 

For UCITS, rules on collateral management are provided in ESMA’s Guidelines on ETFs and 
other  UCITS  issues.  Collateral  received  should  be  highly  liquid  and  traded  on  regulated 
markets or multilateral trading facilities with transparent pricing so that it can be sold quickly. 
It should be valued at least daily and assets with high price volatility should not be accepted 
unless  suitably  conservative  haircuts  are  applied.  In  addition,  the  MMF  Regulation  foresees 
stricter  rules  on  collateral  management  especially  due  to  the  specific  nature  of  MMF.  The 
Commission  is  empowered  to  adopt  delegated  acts  specifying  requirements  on  quantitative 
and qualitative liquidity and credit quality applicable to the collateral received. 

For credit institutions and investment firms that use internal model methods to calculate the 
minimum capital requirement of SFTs, the EU capital requirements framework stipulates the 
establishment of a collateral management unit. MIFID II requires investment firms and credit 
institutions  to  (i)  ensure  for  all  clients  that  the  borrower  of  client  financial  instruments 
provides the appropriate collateral and (ii) monitor the continued appropriateness of collateral 
and take the necessary steps to maintain the balance with the value of client instruments. 

For  insurance  and  reinsurance  undertakings,  the  Solvency  II  Directive26  introduced  the 
"prudent  person  principle",  meaning  that  insurance  undertakings  only  invest  in  assets  and 
instruments  whose  risks  they  can  properly  identify,  measure,  monitor  and  control.  Insurers 
can engage in SFTs if the prudent person principle is satisfied. In this case, collateral must be 
valued  in  accordance  with  the  Solvency  II  Directive  and its delegated  act.  For  occupational 
pension  funds,  a  similar  prudent  person  principle  is  included  in  the  IORP2  Directive27.  In 
addition,  a  proper  risk  management  system  is  introduced  in  order  to  balance  freedom  of 
investment.  As  for  insurers,  if  the  prudent  person  principle  is  satisfied,  pension  funds  can 
engage in SFTs. 

4.6. COLLATERAL HAIRCUTS (FSB RECOMMENDATIONS 12-18) 

The FSB framework on haircuts recommends a two-prong approach: 

1.  qualitative  standards  for  methodologies  used  by  market  participants  to  calculate 

collateral haircuts, and 

2.  numerical  haircut  floors  on  non-centrally  cleared  SFTs,  in  which  financing  against 
collateral other than government debt securities is provided to non-banks, according to 
the table below. 

26 Directive 2009/138/EC of 25 November 2009 
27 Directive (EU) 2016/2341 of 14 December 2016 

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Numerical haircut floors for securities-against-cash transactions 

Residual maturity of collateral 

≤ 1  year debt  securities, and    
Floating Rate Notes (FRNs) 

> 1 year, ≤ 5 years debt securities 

> 5 years, ≤ 10 years debt 
securities 

> 10 years debt securities 

Main index equities 

Other assets within the scope of the 
framework 

Haircut level 

Corporate and other 
issuers 

Securitised products 

0.5% 

1.5% 

3% 

4% 

6% 

10% 

1% 

4% 

6% 

7% 

Source: FSB regulatory framework for haircuts on non-centrally cleared SFTs. 

Recommendations on methodology 

The  minimum  standards  for  the  methodology  used  to  calculate  haircuts  complement  the 
existing entity-based regulation of leverage (for credit institutions and investment firms) and 
specifically address pro-cyclicality. Notably, the scope of this recommendation is broad and it 
applies to all market participants that receive collateral when providing securities financing. 

There are currently no such standards applying to all market participants in the EU. However, 
ESMA’s  Guidelines  on  ETFs  and  other  UCITS  issues  contain  such  standards  for  UCITS. 
More specifically, UCITS should have a clear haircut policy for each asset class received as 
collateral, taking into account asset characteristics, such as credit standing, volatility and the 
outcome of regular stress tests.   

Recommendations on minimum numerical haircut floors 

The numerical haircut floors seek to address the build-up of system-wide leverage outside the 
banking  system.  The  scope  of  the  numerical  haircut  floor  recommendation  is  narrower  (i.e. 
non-centrally cleared SFTs, in which financing against collateral other than government debt 
securities is provided to non-banks) than the one of the recommendation on the methodology 
to calculate haircuts. The haircut floor recommendations are complementary to the Basel III 
framework  and  apply  to  bank  to  non-bank  and  non-bank  to  non-bank  SFTs.  Securities 
financing  received  by  banks  and  investment  firms  subject  to  adequate  capital  and  liquidity 
regulation  on  a  consolidated  basis  (bank  to  bank  SFTs)  is  excluded  from  the  scope  of 
application of the numerical haircut floors,  because  the FSB considers that  applying haircut 
floors to those transactions may duplicate existing requirements. The FSB recommendations 
foresee that numerical haircut floors for bank to non-bank SFTs should first be incorporated 
into the Basel III framework. Authorities should then implement the framework by requiring 
market participants to conduct transactions above the haircut floors. The framework could be 

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implemented  either  through  entity-based  regulation  (i.e.  on  the  basis  of  the  Basel  III 
framework),  or  through  market  regulation,  which  would  capture  a  broader  set  of  entities 
potentially  providing  securities  financing  to  non-banks,  or  through  a  combination  of  these 
methods. 

Currently, there are no regulatory requirements at EU level as regards numerical haircut floors 
for the bank / non-bank to non-bank SFTs in the scope of the FSB recommendation.  

Way forward on haircut recommendations 

There are a number of important considerations when reflecting on potential regulatory action 
on haircuts. 

First,  while  haircuts  can  help  to  restrict  leverage,  their  effects  on  pro-cyclicality  are  not 
entirely  clear  (as  described  in  3.1)  and  may  depend  on  their  implementation  (e.g.  static  vs. 
dynamic haircut  floors). A decision  on potential qualitative or  quantitative rules  on haircuts 
would  benefit  from  a  better  understanding  of  the  mutual  relationship  between  haircuts  and 
procyclicality.  Second,  discussions  between  ESMA  and  market  participants  as  well  as  data 
revealed in that context suggest that the haircuts actually applied by market participants tend 
to be higher or at the level of the haircut floors recommended by the FSB, even in the current 
relatively benign market environment. It is, therefore, not clear to which degree implementing 
the FSB recommendations would have an impact on the market in practice. Third, the SFTs in 
scope of the FSB recommendation on numerical haircut floors represent a limited share of the 
overall market28, and it could be useful to re-assess the scope of possible action on the basis of 
comprehensive  data.  Fourth,  the  incorporation  of  numerical  haircut  floors  for  bank  to  non-
bank SFTs into the Basel III framework which was originally recommended by the FSB for 
the end of 2015 as a prerequisite for authorities introducing the haircut floors is still delayed. 
Finally, other important jurisdictions (e.g. the US and Japan) are also in the early phases of 
their assessments and have not taken a decision on haircut floors yet.  

The aforementioned ESMA report supports this rationale and provides additional information 
on  several  of  the  points  above,  in  particular  in  relation  to  numerical  haircut  floors.29  In 
conclusion, it seems beneficial to assess the potential introduction of qualitative standards and 
numerical haircut floors on the basis of more granular SFT data which will be available once 
the comprehensive reporting obligations of SFTR become effective (according to the current 
planning as of 2019).  

5.  OVERALL CONCLUSIONS 

To  a  large  extent,  the  FSB  recommendations  on  SFTs  have  been  addressed  in  the  EU 
through  the  adoption  of  SFTR  and  specific  provisions  in  sectoral  financial  services 

28 Estimates range from 8% to 35% of the EU repo market and up to 25% of the EU securities lending market, 
according to ESMA (2016). These are upper limits, given that the numbers include bank to bank transactions. 
29 An opinion by the European Systemic Risk Board (ESRB) in contribution to the ESMA report takes a more 
conservative view and recommends the implementation of the FSB framework on numerical haircut floors 
before further data is available. It acknowledges however that there is indeed a general lack of data and that 
further empirical and conceptual analysis is needed. 

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legislation  and  guidelines.  As  such,  there  does  not  seem  to  be  a  need  for  further 
regulatory action at this stage. 

As  regards  the  cross-sector  qualitative  standards  for  the  calculation  of  haircuts  and  the 
introduction  of  numerical  haircut  floors,  an  assessment  of  the  need  for  and  the  scope  of  a 
potential regulatory action in this field should be based on comprehensive and detailed data 
on  SFT  markets  which  will  be  available  once  the  SFTR  reporting  obligation  becomes 
effective.  Moreover,  the  current  market  dynamics  (as  described  in  section  3)  reinforce  the 
need for a certain degree of caution and robust evidence when reflecting on regulatory action 
implying  quantitative  requirements.  Progress  at  international  level  is  comparable  to  the  EU 
(i.e.  in  the  early  assessment  phase)  and  no  other  region  has  taken  a  decision  on  regulatory 
action on haircut floors at this stage. If applicable, the introduction of numerical haircut floors 
should  ideally  happen  in  a  globally  coordinated  manner  to  avoid  compromising  a  level 
playing field or putting market participants in the 'first-moving' jurisdiction at a competitive 
disadvantage.  

The Commission will continue to thoroughly monitor developments in SFT markets and 
the  international  regulatory  space.  The  Commission  will  reassess  the  added  value  of 
qualitative  standards  and  haircut  floors  on  the  basis  of  a  report  to  be  prepared  by 
ESMA once comprehensive SFT data is available. 

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