Parliament's economic and monetary affairs committee recently voted on a regulation aimed at enhancing the transparency of securities financing transactions (SFTs), which are transactions involving the temporary exchange of collateral against cash or securities.
In addition to providing a clear definition of these transactions, the text introduces new obligations for financial actors to report on SFTs concluded to trade repositories authorised by European securities and markets authority (ESMA). It also provides for sanctions for entities in breach of their obligations and for aggregate reporting by the ESMA on SFTs.
"If the difference between both [banking] sectors is too significant, economic activity will be strongly incentivised to migrate to the less regulated sector"
This is a very welcome development because of the increased transparency it brings and it will provide data to enable a better understanding of the shadow banking sector.
New and better regulations are needed to enable institutions that perform functions which are similar to these of a bank to be subject to well defined rules. In particular, SFTs are transactions involving significant leverage and, as such, amplify market developments and could, in times of a downturn, create contagion.
This is why the context of when and where they are used needs to be defined. In particular, we must ensure that SFTs are used by fund managers and investors are fully aware of the possible effects of these products.
There is another reason why new rules are necessary. We need to make sure that there is not too wide a regulatory gap between banks and non-banks. If the difference between both sectors is too significant, economic activity will be strongly incentivised to migrate to the less regulated sector - shadow banking.
This would distort the market and cancel the effect of the efforts made recently to put forward stricter and wiser banking regulation. This is a concern that needs to be addressed in conjunction with the tightening of rules for banks.
We also need to have a better grasp of shadow banking, which cannot remain a blind spot. To make enlightened decisions as well as to inform investors, we need data, information, and knowledge. This should not necessarily mean more regulation, but at the very least we need a better understanding of what is going on in the shadow banking sector.
Good regulation is needed, however, it is very important from my prospective that it does not create an unnecessary additional burden on small and medium sized enterprises (SMEs). These are companies that create jobs and growth and are experiencing difficulties accessing funding from banks and financial markets.
In the current context, where economic activity needs to be boosted, it would be unwise to put in place more obstacles for SMEs with new reporting requirements. Reconciling the need for further transparency must be proportionate and I propose that SMEs not be subject to the requirements introduced in the regulation.
However, the counterparty to the transaction would have to report on the SFTs entered into. This would ensure the details of the transaction would still be disclosed, but without the SME having to take action.
Further to the vote in the economic and monetary affairs committee, trilogues between the parliament, the commission and member states are due to start next month. I expect they will proceed quickly and smoothly.