Draft standards for new EU reporting rules in the securities field would, if implemented, restrict the ability of non-financial corporates (NFCs) to carry out reverse-repo transactions.
That’s according to the European Association of Corporate Treasurers (EACT).
Responding this month to a consultation on the standards, which were proposed under the draft Securities Financing Transactions Regulation (SFTR), the EACT takes issue with its requirements for dual-sided transaction reporting.
In the organisation’s view, that arrangement would be “burdensome and inefficient, without adding value for supervisors or contributing to financial stability”.
It explains: “NFCs enter into reverse-repo transactions for placing their excess cash reserves. Recent developments – such as banks’ increased credit risk, new regulatory liquidity rules and regulatory focus on other short-term investment products, such as money market funds – have contributed to an increased interest in this cash management product by NFCs.”
The EACT says that this is because reverse repo “helps to diversify risk and offers the additional advantage of being secured by collateral”.
Typically, the organisation points out, the types of reverse repos that NFCs enter into are secured by high-quality instruments, and exist for relatively short time periods.
The EACT stresses that it is “concerned” it will be very difficult for NFCs to fulfil the proposed SFTR reporting requirements, as the proposed regime seems “extremely complex”.
It says: “We fear that implementing the SFTR reporting regime as proposed by the European Securities and Markets Authority will strongly discourage NFCs from entering into repo transactions, thereby reducing even more the variety of available corporate cash management tools.
“[For us], the requirement to report the same transaction twice under a dual-sided reporting regime does not enhance the quality of data available to supervisors or their ability to monitor risk concentrations, but only contributes to burden NFCs by adding cost and time spent on efforts to comply with the regulation.”
Non-financial companies, the EACT argues, “are not systemically risky, and therefore the regulatory framework should be proportionate to the risk posed to the financial system”.
It adds: “One aspect that we consider will be particularly challenging for NFCs is the reporting of collateral. Tri-party repos are usually collateralised by a basket of collateral according to pre-agreed parameters.
“The exact securities pledged as collateral are often legion (it is not uncommon to have more than 50 different securities for a single trade) and at least some will change daily (and possibly even intraday) over the life of the repo to take into account movements in the value of the securities.
“Furthermore, the total value of collateral pledged (after margining) will change daily as this is ‘topped up’ to account for accrued interest – calculated daily – to ensure the collateral taker is always fully collateralised for principal and interest.”