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FSB May Seek Tougher Rules for Repos, Securities Lending Deals

Global regulators may seek to toughen regulation of repurchase agreements on concerns that such trades pose potential threats to market stability, the Financial Stability Board said in a report on its website.

Markets for repurchase agreements, or repos, and other types of so-called securities financing are “complex, rapidly evolving and can be opaque for some market participants and policymakers,” the FSB said. The deals can increase “risk-taking within the financial system in a pro-cyclical and potentially destabilizing way.”

Threats to stability may arise from “insufficient rigour” in how collateral in such trades is valued and from “fire sales” of collateral when a party to a trade defaults, the FSB said.

Repos are contracts where one investor agrees to sell a security and then buy it back at a future date and a fixed price. They’re among 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 FSB, which brings together regulators, G-20 central bankers and finance ministry officials, warned last year that shadow banks may create “an opportunity for regulatory arbitrage.”

The board is also examining so-called securities lending agreements, in which institutional investors such as pension funds lend financial instruments against cash collateral.

The group is seeking views on its report until May 25. The board will “develop appropriate policy measures to address risks, where necessary, by the end of 2012,” it said today.

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