European Union regulators may impose tougher collateral requirements on repurchase agreements on concerns that such trades might lead to unsustainable debt levels that threaten market stability.
The European Commission is weighing the extra requirements as part of measures to rein in risky financial activities that take place outside of the regular banking system, according to a document obtained by Bloomberg News. Michel Barnier, the EU’s financial services commissioner, is scheduled to publish the proposals next week.
Repurchase agreements, contracts where one investor agrees to sell a security and then buy it back at a future date and a fixed price, are a “central issue,” according to the document. The EU is working with global regulators to identify “regulatory gaps and inconsistency between jurisdictions,” including for collateral management.
The trades, known as repos, are one of several so-called shadow banking activities being targeted by the Group of 20 nations on concerns they may be used to evade a clamp-down on excessive risk taking. The Financial Stability Board, which brings together regulators, G-20 central bankers and finance ministry officials, said last year that shadow banks may create “an opportunity for regulatory arbitrage.”
Tougher rules on the collateral that investors must give to back repo transactions may be needed be prevent high debt levels that “can increase the fragility of the financial sector and be a source of systemic risk,” the document says.
The FSB has estimated that shadow banking activities were worth around $60 trillion in 2010. This figure would represent 25 to 30 percent of the total financial system, according to the EU document.
In addition to repurchase agreements, the document identifies exchange traded funds, special purpose vehicles, and money market funds as other possible “shadow-banking entities and activities” that may need tougher rules.
Barnier will publish the draft plans next week and may seek to have new rules in place by the start of 2013, according to an EU official who declined to be identified because the talks are private.
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