ICI on FASB, Sec Lending and Repos
Late last week, ICI posted a "ViewPoint" entitled, "Securities Lending and Repos: FSB Intrudes on Areas Best Left to National Regulators, Market Forces." It says, "The Financial Stability Board (FSB), the international body established by the G20 to promote coordination among authorities responsible for financial stability, has made a number of recommendations toward creating a global policy framework for the securities lending and repurchase agreement (repo) markets. These efforts are a part of the FSB's agenda on the so-called shadow banking issue. ICI and ICI Global strongly support the FSB's work in identifying and addressing systemic risks in the securities lending and repo markets. However, in recent letters (ICI and ICI Global), we've urged the FSB to step back from certain recommendations that, in our view, inappropriately intrude on areas best left to market forces, national regulators, or regional regulators." ICI's "Background" explains, "Securities lending and investments in repos are two investment techniques that funds use to improve the return on their portfolios for the benefit of their shareholders.... As the name implies, securities lending involves a loan of securities owned by one party (the beneficial owner of the securities) to another party (the borrower). The borrower gives the lender collateral to secure the loan. Due to strict regulatory limits, securities lending is a relatively minor strategy for most publicly available regulated funds, designed to add incremental returns with minimal additional risk. Regulated funds are most often beneficial owners of the securities being lent, taking and reinvesting cash collateral.... A repurchase agreement, also known as a repo, involves the sale of securities together with an agreement for the seller to buy back the securities later at a slightly higher price. The securities sold collateralize the repo. Investments in repos may be a more prominent strategy for some regulated funds, particularly money market funds. Funds that enter into repos do so only with high-quality counterparties, and most frequently enter into repos as a collateralized short-term cash investment (i.e., they begin and end the transaction with cash). The Financial Stability Board has focused on this area since 2011. Our letters respond to a November 2012 consultation from the FSB, which sets forth the proposed framework. That consultation followed an Interim Report published last April."
