BCBS Amends Requirements on Minimum Haircut Floors for SFTs
BCBS published two technical amendments to the standard on minimum haircut floors for securities financing transactions (SFTs). The technical amendments address an interpretative issue related to collateral upgrade transactions and correct a misstatement of the formula used to calculate haircut floors for netting sets of securities financing transactions. The amendments were published for consultation in January 2021 and have been finalized as originally proposed.
The technical amendments are with respect to the Basel framework's Chapter CRE56, which sets out the calculation methodology for 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 certain specified minimum standards. For collateral upgrade transactions, 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 was open to misinterpretation as it implied that the bank itself is subject to the restrictions on reuse of the 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 replaced 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 replaced 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 was intended to be a weighted average floor of the portfolio. More precisely, the formula was 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 replacing the formula. The worked example contained in CRE56.13 has been updated to reflect the correction of the formula in CRE56.10.
Keywords: International, Banking, Basel, Technical Amendment, SFT, Securities Financing Transactions, Haircut, Netting, Collateral Upgrade Transaction, BCBS
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