On October 14, 2014 the Financial Stability Board (FSB) released their recommendations for haircuts on non-centrally cleared securities financing transactions.

Some highlights from the release include the following:

  • Minimum Methodologies for Setting Haircuts: This recommendation, largely as proposed, states that regulatory authorities should “set qualitative standards for the methodologies that firms use to calculate margins/haircuts, whether on an individual transaction or portfolio basis. . .” and that regulators should “seek to minimize the extent to which these haircut methodologies are procyclical.” The FSB guidance suggests that haircuts “should be based on the market risks of the assets used as collateral and be calibrated at a high confidence level, using a long historical time period that includes at least one stress period, in order to cover potential declines in collateral valuation during liquidation.” The timeline for the recommendation is two-fold: by the end of 2015 the Basal Committee on Banking Supervision is to review existing regulatory requirements for the calculation of collateral haircuts in light of the FSB guidance in order to make them consistent. Then by the end of 2017 national regulators shall have implemented and monitored implementation with the requirement. Query whether the “qualitative standards” for haircut methodologies will result in a form of minimum haircuts for the industry.
  • Minimum Haircut Floors: There are two sets of groups caught up in the minimum haircuts: 1. Banks/broker dealers provide financing to non-banks (e.g. bank to non-bank) and 2. Non-bank to non-bank financing. The non-bank to non-bank is a proposal and comments are requested by December 15, 2014. The FSB anticipates finalizing this proposal by the second quarter of 2015. Repo backed by government securities is not included in the minimum haircuts. Also the release makes clear that repo with a central bank is not included. The proposed minimum haircuts, which are above those proposed in August 2012, are as follows:


The FSB release can be found here.

Good Day. Good Haircuts? DR2