EBF a.i.s.b.l

ETI Registration number: 4722660838-23

56, Avenue des Arts B-1000 Brussels

+32 (0)2 508 37 11 Phone

+32 (0)2 511 23 28 Fax

www.ebf-fbe.eu

EBF a.i.s.b.l

ETI Registration number: 4722660838-23

56, Avenue des Arts B-1000 Brussels

+32 (0)2 508 37 11 Phone

+32 (0)2 511 23 28 Fax

www.ebf-fbe.eu

EBF a.i.s.b.l

ETI Registration number: 4722660838-23

56, Avenue des Arts B-1000 Brussels

+32 (0)2 508 37 11 Phone

+32 (0)2 511 23 28 Fax

www.ebf-fbe.eu

EBF ref. 005283

TB

Brussels, 28 November 2013

Launched in 1960, the European Banking Federation is the voice of the European banking sector from the European

Union and European Free Trade Association countries. The EBF represents the interests of some 4,500 banks, large

and small, wholesale and retail, local and cross-border financial institutions. Together, these banks account for

over 80% of the total assets and deposits and some 80% of all bank loans in the EU alone.

EBF Response to FSB consultation paper on 'Strengthening Oversight and Regulation of Shadow Banking Policy Framework for Addressing Shadow

Banking Risks in Securities Lending and Repos

The EBF welcomes the initiatives undertaken by the Financial Stability Board (FSB) to address the risk of parallel banking activities and the opportunity to contribute to the discussion on how to enhance transparency, strengthen regulation of security financing transactions, and improve market structure, regarding securities lending and repos. We note that some EBF Members will individually submit responses highlighting more detailed concerns, which we urge you to take into full consideration. In addition, the EBF broadly supports the detailed comment letter submitted by the International Capital Market Association (ICMA) – European Repo Council (ERC) and International Securities Lending Association (ISLA), which reflect similar concerns described in this letter.

As banks play an active role in the repo and securities markets around the world, the EBF is very much

interested in upholding the integrity and credibility of these market activities.

While there is a growing consensus that a strengthened regulatory framework is needed to harness the

shadow banking system, it is also necessary to preserve it as a useful channel of financial intermediation

that can provide benefits to the real economy at a time when bank financing is more constrained.

Please find below our comments and responses to the questions in Annex 2 of the consultation document

“Proposed regulatory framework for haircuts on non-centrally cleared securities financing transactions.”

Also, we would like to provide some comments on the Policy Recommendations in Annex 1 of the

consultation document.

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Detailed comments and responses to the questions in Annex 2 “Proposed regulatory framework for

haircuts on non-centrally cleared securities financing transactions.”

General Comments

The EBF requests that similar levels of analysis be performed in respect of other proposals, including the

use of mandatory minimum haircuts. Its concerns include (amongst others) the fact that minimum

haircuts will extract large volumes of liquidity from the market and may not be successful at preventing

further liquidity being withdrawn from the market during a crisis, since lenders may simply take other

action such as reducing existing credit lines.

For that reason, we have strong reservations in relation to numerical floors to haircuts being mandated

by regulation. Haircuts are part of the trades’ price. Quantifying haircuts should remain the prerogative

of the finance industry i.e. market participants, whilst regulators should be independently reviewing the

applied methodology as to risk assessment practice, governance and scope of application.

Mandatorily imposed haircuts might weaken the fiduciary function, as responsibility to discern credit risk

would implicitly be shifted to the regulator.

Above all, minimum haircuts may have unintended consequences such as imposing too high exposures of

banks to non-banking entities (through equity repo for instance), or freezing government bond liquidity.

More generally, we consider that the imposition of haircuts may introduce elements of administrative

control which may hamper the efficiency of the market.

Finally, haircut dynamics also generate sizeable and immediate impact on unsecured debtors, which could

be one of the unintended consequences regulators would wish to avoid, both as a function of market

impact and litigation exposure.

Members appreciate why the FSB would target haircuts as a means to tackle leverage (1) and pro-

cyclicality (2) in shadow banking:

(1) Haircuts may be considered as a first loss protection that places weights on the securities lender (i.e. the repo seller, the cash borrower). First loss protection is the equity rationale from a lender’s point of view; leverage is measured by equity share. Thus, regulating Securities Financing Transactions (SFT) haircuts can be seen as an oblique way to regulate leverage on most market participants.

(2) Haircut levels are assumed to be cycle sensitive, hence the alleged overall SFT pro-cyclicality. Pro-cyclicality from haircuts would come from a positive correlation between haircuts levels and systemic risk premia. Therefore putting a floor on haircuts would prevent the pro-cyclicality caused by too low haircuts during boom times.

However EBF Members have strong reservations in relation to numerical floors to haircuts set by

regulation:

Leverage containment is better addressed at entity level as opposed to transaction levels;

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Using banks only to indirectly regulate SFT may incentivise bank-regulated business lines to switch into the non-bank regulated universe;

Considering all regulated non-banking financial intermediaries as shadow banking entities may incentivise them to deal with other shadow banking entities rather than with banks. Doing so their transactions do not fall within the scope of the proposed regulation anymore.

Hypothesis of haircuts being a major source of pro-cyclicality is contentious at best as other factors will invariably come first.

Thus, regulatory haircut floors appear: o Off-target with regards to their objectives (leverage containment and pro-cyclicality

prevention); o Redundant with regards to existing banking and non-banking specific regulations (in Europe:

CRR, Solvency 2, UCITS and AIFM Directives); o Dangerous with regards to the potential for regulatory arbitrages they create; o Potentially detrimental to liquidity and well-functioning market activities.

One thing that cannot be stressed enough is the fact that a CCP, in particular if the use of haircuts

became mandatory, would not present a level playing field for all market participants. The cost to the

borrower when using a CCP is higher than the cost to the lender.

Responses to the Questions in Annex II

Q1. Do the proposed policy recommendations in Annex 2 adequately limit the build-up of excessive

leverage and reduce procyclicality? Are there alternative approaches to risk mitigation that the FSB should

consider to address such risks in the securities financing markets? If so, please describe such approaches

and explain how they address the risks. Are they likely to be adequate under situations of extreme

financial stress?

While indirect regulation via banks may prove indispensable, we do not support the principle of regulating

shadow banking entities through the banking sector only. Targeting the banking sector alone does not

seem efficient if the objective is to regulate shadow banking entities that are not regulated as banks. Rules

will be much more efficient if control and penalties are supported both by the banking and the shadow

banking industry.

Furthermore, we do not believe that haircuts are pro-cyclical and the hypothesis of asset-sensitive

haircuts being a major source of pro-cyclicality is hardly verifiable as other factors will invariably come

first; such as the decision to lend or not to lend to a given counterparty regardless of collateral, and if

applicable, credit limits, counterparty risk premium (idiosyncratic spread being priced), maturity.

There is significant evidence available with regards to haircuts and assumed pro-cyclicality thereof:

Data on the insignificant impact of repo haircuts in terms of the scale of deleveraging in Europe from 2007 to 2009 may be found in an ICMA/ERC document named “Haircuts in initial margins in the repo market” (February 2012).

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As for the US market, one may refer to a January 2012 NBER Working Paper named “Sizing up repo”, which reached the same conclusion with regards to haircut overall relative stability between 2007 and 2010.

Consensus has emerged that leverage containment is better addressed at entity level as opposed to

transaction levels (such as haircut floors on long only securities financing transactions). Direct regulatory

limits on leverage offers greater certainty than the indirect, unproven and questionable mechanism of

minimum mandatory haircuts.

Current proposed haircut levels are not way out of line with current market levels. However, regulatory

levels may create some uncertainty with regards to their possible upward regulatory revision. If minimum

haircuts are to be set, these should only serve as a backstop-regime. Otherwise, the haircuts would distort

market forces and set incentives not to use risk-sensitive haircuts.

Furthermore, the patchy implementation for minimum haircuts will create side effects that will incentivise

dealing counterparties (both borrowers and lenders) to opt for a less regulated environment.

Q2. What issues do you see affecting the effective implementation of the policy recommendations?

The EBF urges the FSB to make sure that a level playing field is maintained when implementing its

recommendations on shadow banking. It is necessary to take into account the existing or proposed

framework implemented for each entity in a geographical perimeter. We believe that much has already

been done regionally concerning the banking system as well as the non-banking system. Thus, we are

highly supportive that the FSB focus on potential arbitrage which may exist between identical entities

submitted to different jurisdictions.

Considering the nature and specificities of various market actors, same functions or same activities must

call for equivalent but not identical regulations in order to address the same objectives and have the same

effects and consequences.

Please see also our answer to question 7.

Q3. Please address any costs and benefits, as well as potential material unintended consequences arising

from implementation of the policy recommendations? Please provide quantitative answers, to the extent

possible that would assist the FSB in carrying out a quantitative impact assessment.

EBF Members are concerned that possible consequences would be a marginal fall in overall liquidity, or a

potentially systemic fall depending on the implementation scope. See also answer to question 8.

Furthermore:

Relative pricing between unsecured and secured funding pricing may be distorted.

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It may incite to relocate market-based finance business “into the shade” so that securities financing takes place between non-regulated entities for the most part.

Last but not least, flooring haircuts may discourage risk-based approaches which may stick to the

regulatory floors as proprietary methods may no longer provide a competitive advantage. A regulator

imposing mandatory haircuts may blur the separation of duty principle between economic agents and

their supervisors.

Q4. What is the appropriate phase-in period to implement the policy recommendations? Please explain

for (i) minimum standards for methodologies and (ii) the proposed framework for numerical haircut floors

separately.

See answer to question 20.

Q5. Are the minimum standards described in Section 2 appropriate to capture all important factors that

should be taken into account in setting risk-based haircuts? Are there any other important considerations

that should be included? How are the above considerations aligned with current market practices?

We have some conceptual reservations on pro-cyclical VaR use. The FSB requirement that time series of

price data should cover “at least one stress period” may mitigate such pro-cyclicality without eliminating

it (lengthening a cycle dependency rather than eliminating it). Besides, it should be recalled that SFT are

subject to regular margin calls and that counterparty linked credit decisions (volume and price) come

ahead of collateral linked haircut decisions in times of market stress.

From a more discretionary judgemental view, one may also push to have legal (bankruptcy law) and

operational (hardly quantifiable) risks as further inputs to assess haircut levels for a given counterparty

(in addition to idiosyncratic “wrong way risk” as described by the FSB: degree of correlation between

borrower and collateral risks).

Lastly, haircut calibration cannot ignore margin calls specificities (minimum transfer amounts, calls

frequency; e.g. the more frequent the margining, the less important the haircut).

For illustration purposes, internal “add-on” modelled risks are calculated for regulatory capital

requirements. Its methodology is comparable to haircuts and both risk based add-on risk and actual

haircut can be compared (especially if a haircut is inferior to an add-on): thus modelled add-on risk may

be seen as guidance for business decisions on haircut percentaegs. Add-on model input include in

particular:

99th percentile of the distribution of future prices of a given bond, with respect to the Interest rates and credit risk factors,

Duration and rating.

6

Q6. Would the additional considerations described in Section 3 appropriately capture all important factors

that should be taken into account in setting risk-based haircuts on a portfolio basis? Are there any other

important considerations that should be included? How are the above considerations aligned with current

market practices?

Methodology inputs in Section 3 look appropriate but not exhaustive. In particular, the EBF is supportive

of the risk based approach proposed by the FSB for portfolio margining. We do consider that the

methodology should take into consideration:

contractual arrangements allowing close out netting

market risk of the whole portfolio,

credit risk of the whole portfolio,

portfolio concentration by geographies, economic sectors and individual issuers,

illiquidity of the portfolio,

risk arising from non-correlated prices and spread relationships between lent and collateral portfolio assets.

Those six parameters capture most of the important factors that should be taken into account in setting

risk-based haircuts.

Haircuts should consider the whole collateralised portfolio of exposures so that collateral risk is better

reflected. Such risk will be assessed depending on all positions (long and short) and assumed correlations

thereof.

We do not think numerical haircut floors should apply whenever portfolio margining is relied upon. Those

two methods should be exclusive of each other. A bank relying on a risk based portfolio approach has to

accurately capture all actual risk parameters of a transaction. Its analysis is hence much closer to its actual

risks, whereas if numerical haircuts were the driver, banks would be dis-incentivised to conduct actual risk

analysis.

In particular, numerical haircut floors are not well calibrated for portfolio margining and it will be very

difficult to capture all situations. This can be illustrated through three examples of portfolios:

(1) Long / short portfolio with good correlation (e.g. a Convertible Bond vs. its underlying), the numerical haircut floors will make no sense as a very small haircut will be applied as the long positions can be netted with the short positions.

(2) Long/short portfolio well diversified: in such case, the numerical haircut floors are not appropriate as they would lead to a very high and unjustified average haircut. A risk-based portfolio approach is much more appropriate as it would take into consideration all risks and parameters.

(3) Long only portfolio with derivatives, such as long option with an option premium of 3%, in that case there will be a situation where the haircut could be higher than the premium. In this situation a risk based approach will be much more appropriate to take in consideration all risks and parameters.

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In most instances, the risk based portfolio approach encompasses the credit worthiness of the

counterparty and the characteristics of the trade, whereas if numerical haircuts are the driving parameter

then banks may lighten their analysis process for assessing the creditworthiness of a given counterparty.

Q7. In your view, is there a practical need for further clarification with regard to the definition of proposed

scope of application for numerical haircut floors?

There is a strong need for clarification on which entities this proposal will apply to. In that sense, the EBF

strongly believes that adequately regulated non-banking financial intermediaries (i.e. non-banks subject

to regulations addressing the objective of this regulation) should be qualified as equivalent to banks within

the scope of this regulation.

Q8. Would the proposed scope of application for numerical haircut floors be effective in limiting the build-

up of excessive leverage outside the banking system and reducing procyclicality of that leverage, while

preserving liquid and well-functioning markets? Should the scope of application be expanded (for

example, to include securities financing transactions backed by government securities), and if so why?

If the scope is on all non-banking entities: the systemic damage on liquidity and well-functioning markets

could indeed prevent excessive leverage and pro-cyclicality as the threat could disappear along with the

targeted transactions (unless more business gets done between non-regulated borrowers and lenders).

Regulations in place in some jurisdictions are constraining enough in terms of leverage, market and credit

risks, to refrain from calling such entities as non-regulated. Not only the distributed funds but also their

managers are submitted to regulations and/or relevant supervision.

Of no less relevance, some funds are required to have its assets posted into a legally segregated custodian

account. Such custodians shall control its clients in terms of compliance. It cannot be stressed enough that

a given UCITS asset are segregated into a bankruptcy remote part of its custodian.

The depositary has legal means to make sure that secured lenders are not treated on a par with UCITS

shareholders.

We take note of the implicit incentive to clear through CCP (which may reduce counterparty risks at the

expense of concentration risk).

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Q9. In your view, what would be the impact of introducing the numerical haircut floors only on securities

financing transaction where regulated intermediaries extend credit to other entities? Does this create

regulatory arbitrage opportunities? If so, please explain the possible regulatory arbitrage that may be

created and their impact on market practices and activity.

Q10. In your view, would the proposed levels of numerical haircut floors as set out in table 1 be effective

in reducing procyclicality and in limiting the build-up of excessive leverage, while preserving liquid and

well-functioning markets? If not, please explain the levels of numerical haircut floors that you think are

more appropriate and the underlying reasons.

The haircut floor levels set out in table 1 do not appear way out of line with current market standards,

even though market practice is far more granular in its approach.

Q11. Are there additional factors that should be considered in setting numerical haircut floors as set out

in table 1? For example, should “investment grade” or other credit quality features be factored in?

No we do not think there are additional factors.

Q12. Are there any practical difficulties in applying the numerical haircut floors at the portfolio level as

described above? If so, please explain and suggest alternative approaches for applying the numerical

haircut floors to portfolio-based haircut practices?

We do not see any practical difficulties on this topic.

Q13. What are your views on the merits and impacts of exempting cash-collateralised securities lending

transactions from the proposed framework of numerical haircut floors if the lender of the securities

reinvests the cash collateral into a separate reinvestment fund and/or account subject to regulations (or

regulatory guidance) meeting the minimum standards? Do you see any practical difficulties in

implementing this exemption? If so, what alternative approach to implementing the proposed exemption

would you suggest?

It will be challenging for banks to effectively monitor cash reinvestment made by non-regulated entities

given that cash collateral received by securities lenders should not be in the scope notably because cash

is a very effective form of collateral and it is estimated that approaching 50% of all transactions in the

global securities lending segment are collateralised with cash.

Moreover, in some parts of the world lenders are actively encouraged to accept cash by regulation. In

terms of requiring cash collateral to be reinvested in accordance with the FSBs minimum standards we

believe that this may have some merit but the implementation of this will be fraught with practical

difficulty.

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Q14. Do you think cash-collateralised securities borrowing transactions where the cash is used by the

securities lender to meet margin requirements at a CCP should also be exempted from the proposed

framework of numerical haircut floors?

As already mentioned in Question 13 above we see some difficulties in banks monitoring cash

reinvestment made by non-regulated entities.

Despite the fact that the use of cash collateral should be exempted we do not see clearly how such an

exemption could work in practice as it would have to identify / segregate this collateral before transferring

it to a CCP.

Q15. What are your views on the proposed treatment of collateral upgrade transactions described above?

Please explain an alternative approach you think is more effective if any.

“Collateral upgrade” boils down to crossing a repo and a reverse repo: buying and selling repos on

different collaterals. Preventing collateral re-use does not necessarily address excessive leverage and pro-

cyclicality, but certainly creates other problems (negative impact on liquidity overall).

Q16. What are your views on exempting collateral upgrade transactions from the proposed framework of

numerical haircut floors if securities lenders are unable to re-use collateral securities received against

securities lending and therefore do not obtain financing against that collateral?

We have made a number of suggestions in this response which we believe are important in order to avoid

detrimental impacts to collateral velocity, liquidity and well-functioning markets.

Q17. What do you view as the main potential benefits, the likely impact on market activities, and possible

material unintended consequences on the liquidity and functioning of markets of introducing the

proposed framework of numerical haircut floors on securities financing transactions as described above?

Levelling haircuts may dis-incentivise best practice for risk management. Furthermore, uncertainty

regarding futures floors updates, revisions and methodology evolution could dry up liquidity further.

We understand the view of the FSB that regulatory capital regimes have the merit to already exist and

that using this tool is easier and faster to deploy than going through a new regulation. Nevertheless, we

are under the impression that such a message might not be as strong as initially intended: such a proposal

would signal to the market participants that the floor is not mandatory but only indicative, and that not

applying the floor “only” leads to a capital surcharge.

One might also fear that such a proposal will not achieve its goal:

10

market participants are not using exclusively SFT to finance funds and only repos are included in the scope of the proposal;

capital calculations are produced based on the stock at reporting dates and do not reflect activity between those dates, and ill-intentioned participant could easily circumvent the rule.

In addition, the proposal lacks clarity since as far as repos are concerned capital regimes impact not only

counterparty risk but also CVA risk, large exposure, liquidity ratios and leverage ratio. Therefore, we

believe that FSB should further clarify its goal before choosing such an option.

Lastly, we strongly advocate FSB not to further disconnect the capital regimes from the economics of the

bank. Indeed, it would be detrimental that the capital ratio were discredited and not used any more as a

management tool. For this matter we want to stress that the level of the haircut does not impact the

eligibility of the collateral, and that the level of haircut is already a significant factor to determine the

residual risk exposure.

Q18. Would implementing the proposed numerical haircut floors through regulatory capital or minimum

margin regimes for regulated intermediaries be effective in reducing procyclicality and in limiting the

build-up of excessive leverage by entities not subject to capital or liquidity regulation?

See answers to question 1 and 8.

Q19. Are there specific transactions or instruments for which the application of the proposed framework

of numerical haircut floors may cause practical difficulties? If so, please explain such transactions and

suggest possible ways to overcome such difficulties.

No comment.

Q20. What would be an appropriate phase-in period for implementing the proposed regulatory

framework for haircuts on non-centrally cleared securities financing transactions? Please explain for (i)

minimum qualitative standards for methodologies and for (ii) numerical haircut floors separately.

The phase-in period should be consistent with the implementation of the Basel III framework and the

rules on bilateral margining for OTC derivatives.

Comments on the Policy Recommendations as set out in Annex I of the consultation document

Scope

The development of shadow banking regulation is still at an early stage, and most market participants are

likely to be affected by such regulation. A consistent definition of “shadow banking” needs to be adopted.

We understand that you relate to the expression “shadow banking” the population formed with all non-

banking financial intermediaries. We note that non-banks (mainly institutional investors, hedge funds,

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MMFs, securitization institutions) do not form a homogeneous population (either in terms of business, or

in term of risk profile, or in terms of regulation). The heterogeneity of this population reinforces the point

which is the inadequacy of a new regulatory project which would pretend to cover this entire scope by

adding regulation to the sectoral regulations that already exist or are being planned.

We agree with the perimeter considered by the FSB. However we disagree with their approach. Indeed

we consider that the analysis should focus on making sure that regulations are consistent and based on

the general principle that same functions or same activities call for equivalent regulations (whatever the

nature of the performer of the activities and its jurisdiction) in order to address the same objectives and

have the same effects and consequences. When it is the case, no additional rule should be added (at the

risk of creating an undue double penalty) under the false pretext that the entities belong to the so-called

shadow banking. From this perspective UCITS funds, for instance, should be considered as equivalent to

banks considering that there are specific provisions that determine that leverage is possible up to a certain

percentage of the fund’s net asset value. Another example: the AIFM Directive established specific

reporting mechanisms regarding leveraging of AIFM funds: it is now possible for the fund’s respective

supervisory entity to impose limits, in order to reduce the use of leverage and, therefore, prevent systemic

risks.

Regulatory minimum haircuts for regulated banks’ securities funding transactions (SFT) with non-bank

investors will put regulated banks in the position of shadow supervisors of all non-banking financial

intermediaries (whether or not regulated) dealing with them. In our view, this will have three negative

consequences: the burden of the regulation is borne by banks only (at the risk of seeing banks removed

from the market which would create an uneven playing field and would also weaken the regulation's

efficiency); adequately regulated non-banking financial intermediaries do not contribute to the regulation

as indirect regulators (considering them as equivalent to banks in the scope of this regulation would

prevent them from a double penalty when dealing with a bank and in the same time it would alleviate the

preceding weakness of the framework as regards banks); it leaves unregulated, or poorly regulated, non-

banking financial intermediaries out of the scope of the regulation when transacting with non-banking

financial intermediaries (by using banks and regulated non-banking financial intermediaries as indirect

regulators, this structural weakness of the proposed approach would be reduced to the transactions done

by unregulated financial intermediaries amongst themselves).

We would also like to stress that any significant variation in the definition or scope of such regulation

ultimately applied by different jurisdictions will inevitably lead to uncertainty and disruption, as well as

the opportunity for regulatory arbitrage.

Improvement of transparency (recommendations 1 & 2)

The EBF is supportive of recommendation 1 which relates to transparency and the need for authorities to

obtain more granular data. Nevertheless, we would like to ask for more clarity on the objectives which

authorities would like to achieve through the increase of transparency.

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Once trade repositories (TRs) will be implemented in the context of the repo and securities lending

markets, it is unclear how authorities intend to use them. The purposes for any reporting obligation to

TRs or for any other reporting or transparency requirements would need to be defined in advance and a

careful assessment should be carried out in respect of the potential impact such reporting obligations or

requirements may have and whether the perceived advantages outweigh any disadvantages and risks

connected to such obligations or requirements.

In addition, we are very concerned about the way data transferred to trade repositories could be disclosed

to third parties. The information provided by counterparties would be of a highly sensitive nature. Any

uncontrolled public disclosure may have far reaching negative consequences for the counterparties and

the markets as a whole. It is therefore of the utmost importance that access to the data is clearly limited

to specific purposes and only to the relevant authorities and that the TRs adhere to the highest standards

for data security.

In view of the above the structure of any reporting requirements and, in particular the requirements

defining the content and scope of the reports, would have to be carefully designed in consultation with

the market participants.

This intent to procure transparency should be borne and framed by the following principles:

Detailed articulation of the regulatory concern and risk metrics;

Clear definition of underlying product scope, and transaction perimeter;

Reduce redundancy scope by including existing regulatory remits (amongst others Basel III capital and liquidity regulatory guidelines) on both regulated and non-regulated shadow banking segments activity;

Seeking full industry involvement;

Leveraging on existing initiatives (ICMA-ERC quarterly survey, and other initiatives);

Attempting to calibrate full activity landscape by product type and region.

It is only once the full activity landscape will have been depicted, that a potential road map could be rolled

out.

The EBF understand that some buy-side market participants are supportive of many of the suggested

measures of the FSB, such as improved transparency in areas such as MMF and ETF markets, but stresses

that so long as such measures are tailored carefully to ensure that there is no impairment of liquidity or

stifling of growth.

Definition of client assets, re-hypothecation and re-use (recommendations 7 & 8)

Regarding the considerable differences between legal regimes, it would be of great importance to agree

on a common understanding or definition of the terms “client assets”, “re-hypothecation” and “re-use”:

In practice, the terms “re-use” and “re-hypothecation” are sometimes used interchangeably and are also

sometimes used to describe very different practices with different legal effects. In particular, a clear

distinction has to be made between the issue of the legal manner in which securities are provided by

counterparties for the purpose of collateralisation (by way of full title-transfer, by way of pledge or any

13

similar means under applicable law) on the one hand and the issue of use of securities obtained by means

of a financial transaction such as a repo or securities lending transaction from a counterparty for other

financial transactions with another counterparty on the other hand. This distinction is also crucial for the

definition of “client assets” as well as the fact that “client money” cannot be regarded as “client assets”

in some jurisdictions whereas in others it is included.

Furthermore, the practical consequences of any restrictions on re-use/re-hypothecation on the market,

in particular market liquidity has to be taken into consideration. Re-hypothecation or re-use is an

important tool to ensure market liquidity. Restrictions can therefore have far reaching negative effects.

Mandatory central clearing (recommendation 10)

Regarding recommendation 10 on central clearing, we would like to underline that a significant proportion

of the repo market is already centrally cleared, notably when it relates to government bonds. We are

therefore supportive of any measure aimed to incentivise the central clearing for products which are

suitable for clearing.

However, we strongly believe that central clearing can only apply to certain types of transactions and can therefore not be mandatory: Many repo and securities lending transactions are not suitable /eligible for central clearing due to insufficient standardisation of the transactions and/or insufficient liquidity of the object of the transaction. In addition, a significant portion of transactions have very short maturities of less than a week or overnight. Central clearing for such transactions would be clearly unreasonable.

In light of the above we fully support the position of the consultation paper that mandatory central

clearing, is not an obvious solution.