Limits to Be Placed on Re-hypothecation

FSB is considering rules on whether and how banks should be allowed to use client assets as collateral for their own trades.

Brokers face restrictions on using clients’ assets as collateral for other trades, as part of a push by global regulators to prevent the securities lending market from sparking chain reactions that could cause a crisis.

Under recommendations published today by the Financial Stability Board (FSB), brokers wouldn’t be allowed to tap client assets for their own trading, and they would have to provide “sufficient disclosure” of plans to use the securities as collateral in other transactions. They would also have to meet minimum standards in managing liquidity risks.

Non-Banks

In addition to curbs on client-asset use, the FSB is calling for pension funds, insurers, and other non-banks active in these markets to face tougher rules, including liquidity requirements, when they reinvest cash collateral.

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