Global banking regulators are sounding the alarm that trillions of dollars' worth of short-term loans could complicate their efforts to handle a failing financial institution, said people familiar with the talks.
The regulators are calling for changes to terms of contracts called repurchase agreements, or repos, and securities-lending agreements, the people familiar said. In these arrangements, trading firms, banks and investment companies typically swap cash and securities with promises to reverse the transactions in the future.
The plan is regulators' latest bid to end so-called "too-big-to-fail" firms, which are so interconnected that regulators believe their demise risks bringing the entire financial system to its knees. In a bid to prevent a replay of 2008, when Lehman Brothers Holdings Inc. failed after running out of appropriate collateral for repo loans, regulators have made separate changes to the workings of the repo markets.
Regulators' hope is to now have more time to resolve institutions that are teetering on the brink of collapse, reflecting the lessons learned in the 2008 crisis. When resolving a failing firm, a regulator will move in to try and stop it from collapse or allow it to collapse without any associated taxpayer bailout.
Under the changes proposed, firms trading with a troubled financial institution would agree to temporary waivers of certain contractual rights they currently enjoy, such as the ability to terminate their contracts early, buying regulators and the firm time to arrange a lifeline.
Regulators already pushed for the changes on derivatives called swaps, a roughly $700 trillion global market that allows users to hedge or speculate on everything from the path of interest rates to the price of oil.
Last year, the largest 18 banks in the U.S., Europe and Japan agreed to wait up to 48 hours before seeking to pull out of their swaps early, and before collecting related payments, when a trading partner is failing. Those changes took effect in January.
Now, regulators want firms to apply similar changes to the key short-term contracts like repos and securities lending agreements, said industry executives involved in the discussions.
"Work is under way amongst market participants to expand the process to other types of contracts," said Eva Hüpkes, adviser to the secretariat of the Basel, Switzerland-based Financial Stability Board, a body that promotes international financial stability and is encouraging banks' expansion of the work done for swaps.
Banks are generally on board with the proposal to expand the swaps initiative to cover repos and other contracts, said people familiar with the matter.
The discussions come at the urging of regulators at the Bank of England, the Federal Reserve, and the Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency, among others, the people familiar said.
Officials at those regulators have reached out to industry groups that publish standard trading documents for the short-term lending contracts and asked them to suggest procedures for ensuring the changes are applied consistently across different jurisdictions, the people added.
Representatives of the regulators either declined to comment or had no immediate comment.
A primary focus for regulators in the U.S., U.K., Germany, France, Switzerland and Japan--where many major banks are based--has been to keep a failing firm operating long enough to find a buyer, recapitalize it, or move its healthiest parts to a new "bridge" company.
Since banks with sprawling securities businesses often conduct trades overseas with trading partners not governed by their domestic laws, the regulators have asked firms to be bound by provisions that would enable them to resolve firms with contracts stretching across international borders.
Last year's agreements for swaps--signed by units of banks including Goldman Sachs Group Inc., Barclays PLC, Citigroup Inc. and others--were coordinated by the International Swaps and Derivatives Association, or ISDA, which could be called upon to help with the expanded phase, said some people involved.
Others that are expected to play a role are the International Securities Lending Association, as well as the International Capital Market Association and SIFMA, which oversee documentation for repos.
The value of outstanding repo trades secured by a range of U.S. Treasury bonds was $2.39 trillion as of the end of March, according to data from the Securities Industry and Financial Markets Association. The average daily volume of such trades for March was $108.66 billion.
The goal is to amend the additional contract types sometime later this year, the people familiar said. Last year's work was completed in time for Mark Carney, governor of the Bank of England, to make it a feature of November's Group of 20 summit of major economies in Brisbane, Australia.
The expansion also is aiming to bring in a broader scope of financial institutions than banks.
To get the investors onto the same footing as banks, U.S. regulators are considering writing a rule that would prevent banks from trading with firms that haven't agreed to the industry changes, effectively forcing fund managers to sign up or risk being shut out of the market, said people familiar with the discussions.
Such a move "is a critical step to addressing concerns about too-big-to-fail," said Robert Pickel, former chief executive of ISDA.
Write to Katy Burne at katy.burne@wsj.com
(END) Dow Jones Newswires
April 14, 2015 18:40 ET (22:40 GMT)
#FX
#Forex
#RegulatorsCall
#ShortTerms
#LoanChanges
0 Response to "Regulators Call for Short-Term Loans Changes to Handle 'Too-Big-to-Fail'"
Thanks for give comment.