BCBS is consulting on two technical amendments to the rules on minimum haircut floors for securities financing transactions, or SFTs. The technical amendments seek to address an interpretative issue related to collateral upgrade transactions and to correct a misstatement of the formula used to calculate haircut floors for netting sets of securities financing transactions. The comment period on the proposed technical amendments ends on March 31, 2021.
BCBS is consulting on technical amendments related to chapter CRE56 of the consolidated Basel framework, which sets out the calculation of minimum haircut floors on securities financing transactions. CRE56 requires banks to check that the haircuts applied to collateral in their securities financing transactions comply with a set of minimum floors. CRE56 includes certain exemptions from the haircut floor requirements. For cash-collateralized securities lending transactions, CRE56.4 includes an exemption if the counterparty that receives the cash from the bank reinvests it in a way that meets the specified minimum standards. For collateral upgrade transactions, CRE56.5 specifies that banks that lend securities are exempted from the haircut floors on collateral upgrade transactions if they are unable to re-use, or provide representations that they do not and will not re-use, the securities received as collateral against the securities lent. CRE56.5 is open to misinterpretation, as it implies that the bank itself is subject to restrictions on the reuse of collateral, which would be inconsistent with the treatment of cash collateralized transactions set out in CRE56.4, where it is the bank’s counterparty that is subject to the restrictions.
To avoid misinterpretation, BCBS proposes to replace CRE56.5 with the following text: "Banks that borrow (or lend) securities are exempted from the haircut floors on collateral upgrade transactions if the recipient of the securities that the bank has delivered as collateral (or lent) is either (i) unable to re-use the securities (for example, because the securities have been provided under a pledge arrangement), or (ii) provides representations to the bank that they do not and will not re-use the securities." In addition, BCBS proposes to replace the formula for calculation of the “portfolio” haircut floor for a netting set of securities financing transactions in CRE56.10. The footnote to CRE56.10 explains that the formula is intended to be a weighted average floor of the portfolio. More precisely, the formula is intended to be the exposure-weighted average haircut amount for net-lent securities divided by the exposure-weighted average haircut amount for net-received securities. However, the formula that was developed was oversimplified before publication. Therefore, BCBS is proposing to replace it.
Comment Due Date: March 31, 2021
Keywords: International, Banking, Basel, Technical Amendment, SFT, Securities Financing Transactions, Haircut, Netting, Collateral Upgrade Transaction, BCBS
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