EUROPE – The European Securities and Markets Authority (ESMA) does not intend to draft any further guidelines governing securities lending and the repo market other than those already announced, the authority's chairman has said.

The comments made by Steven Maijoor, chair of ESMA, come at a time when repo users expect Brussels to strengthen regulation of the market, increasingly used by end-user clients, such as pension funds, during derivatives trades.

Talking to IPE's sister publication IPNederland, Maijoor noted that the securities lending and repo markets were part of the shadow banking system, for which the authority had already drafted guidelines last year. He said that the authority would not seek to draft any further guidelines for those markets at this time.

Maijoor nonetheless conceded that the implementation of the guidelines was now ESMA's priority and that the European Commission might decide to sign those draft proposals into law.

He said: "A guideline compels the affected institutions to 'comply or explain', but when signed into law, this would take things a step further.

"That, however, is a matter for the European Commission," he said. "The ball is in their court."

The guidelines set by ESMA last year relate to the involvement of UCITS funds with the securities lending and repo markets and require fund managers to advise their investors if any UCITS funds are involved in such transactions.

The proposals also include requirements regarding the time it takes to recall securities or undo a repo transaction.

As part of the central clearing requirements for over-the-counter (OTC) derivatives under the European Market Infrastructure Regulation (EMIR) – from which pension funds have been granted a temporary exemption – clearing houses will require market players to post two types of collateral to support their position.

Collateral requirements will take the form of initial margin, which will be posted either in cash or in highly liquid securities, as well as variation margin – which will be posted in cash only.

Pension representatives have in the past voiced concerns over such requirements, arguing that pension funds do not traditionally sit on large piles of cash. Funds would therefore need to find alternative solutions to transform their securities into cash to meet their margin calls.

One solution could be the use of the repo market, in which banks or other cash providers would provide the liquidity needed by end-user clients in exchange of securities.

However, fees and haircuts apply to the repo market, depending on the credit rating and the quality of the securities clients post.

One of the major issues facing policymakers stems from the different levels of imposed haircuts.

David Field, executive director at investment banking consultancy Rule Financial, told IPE that, while haircuts tend to be low when markets are calm, they also tend to increase significantly as soon as markets became more volatile, which magnifies the problem, making it procyclical.
“Regulators don't like this", Field added, "so they are beginning to turn their attention to standardising haircuts at some future date".

The full Dutch language interview with Steven Maijoor will be published in the upcoming April/May issue of IPNederland.