EU Moves to Shine Light on Shadow Banking Trades to Rein in Risk

  • ESMA publishes discussion paper for new reporting standards
  • Traders could be expected to report collateral quality data

European regulators are stepping up efforts to bring transparency to shadow banking.

Banks and asset managers that lend stocks and bonds in return for cash will be expected to report information on the short-term transactions to databases intended to help authorities spot risks, the European Securities and Markets Authority said Friday in a discussion paper.

The regulation, “responds to the need to enhance the transparency of securities financing markets and thus of the financial system,” ESMA, which expects to complete final rules by January, said in the paper.

The document, which is open to comment from the industry, lays out possible reporting standards for trade repositories accepting information about deals such as the multi-trillion dollar market in repurchase agreements. Traders could be expected to report the type and quality of collateral used in transactions and whether it has been reused to backstop additional trades.

Global regulators moved to bolster oversight of so-called shadow banking activities after the 2008 credit crisis, when securities lending transactions allowed leverage to build up in the industry. This went largely unchecked by authorities because the deals took place outside the traditional banking system.

Securities financing transactions include trades such as lending or borrowing stocks and bonds as well as repurchase agreements, in which assets can be pledged for short-term cash loans. In Europe, there were 5.6 trillion euros ($6.2 trillion) in outstanding repo contracts on the books of 65 firms at the end of 2014, according to the latest survey from the International Capital Market Association.

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