So what does the future hold? At one level, it’s too early to predict the future of securities financing and repo with much certainty because the regulatory reforms impacting market participants are far from complete. As pointed out by Mario Nava, Director of the Financial System Surveillance and Crisis Management Directorate in the European Commission’s Directorate General for Financial Stability, Financial Services and Capital Markets Union, Basel III’s Net Stable Funding Ratio (NSFR) does not even come into full force until 2019.
The NSFR is one of a number of Basel III requirements that are widely held to diminish sell-side repo appetite. But Nava said blaming Basel was a catch-all excuse, arguing it is difficult to disentangle prudential reforms from other developments, including macro-economic policies and changes in market infrastructure, as contributing factors to falling volumes among traditional market participants. Nevertheless, market regulators and supervisors are alert to the need to refine the regulatory framework to take account of unintended consequences. “There are two underlying principles to good regulation. First, never think you know; always consult the market. Second, give things time to settle,” said Nava. The Commission’s review process for amending the European Capital Requirements Regulation and Directive (CRR/CRD IV) and related activity under the Capital Markets Union would help to improve existing regulation, he added.
Catch-all or not, Basel III is seen as front and centre of the regulatory reforms that have shaken up the market, indirectly or directly. In polling during the session, 49% of conference delegates said Basel III represented the biggest regulatory threat to the securities finance and repo markets, while 32% cited the Securities Financing Transactions Directive. To underline the point, 100% of responding delegates voted answered ‘no’ to the question: Is the regulatory storm behind us?