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Regulatory Update - 3Q 2013

Despite the summer vacation period, the pace of regulatory review and changes has continued, with the publication of the Financial Stability Board's ("FSB") Policy Framework for Securities Lending and Repo.

FSB – Policy Framework for Securities Lending and Repo

On August 29, 2013, the FSB published a document entitled "Strengthening Oversight and Regulation of Shadow Banking – Policy Framework for Addressing Shadow Banking Risks in Securities Lending and Repos" (the "Policy"). A copy of the Policy can be found on the FSB's websiteWeblinking practices

The Policy covers the main themes for which the FSB had requested feedback in its prior consultation in November 2012 – transparency, collateral policy (specifically cash collateral), and structural elements of the securities financing market.

Transparency – the Policy makes five recommendations in this area, suggesting, amongst others, the need for more granular data on securities lending and repo exposures to be submitted by financial institutions to regulators, and the development of improved public disclosure standards for financial institutions participating in securities lending, repo and collateral management activities. The report stops short of specifying the data fields that are required, but the FSB has established a 'technical data experts group' which will develop proposed reporting standards and processes. The FSB will publish its conclusions by the end of 2014. In addition, the FSB has recommended to the Enhanced Disclosure Task Force (a sub group of experts formed by the FSB in May 2012 to consider risk reporting standards) certain disclosure standards for consideration.

Collateral Policy – the Policy makes four recommendations in the area of collateral policy. In relation to cash collateral reinvestment, the FSB sets out a number of high-level principles which should be considered by both the lender and its agent. In addition, there are recommendations to regulatory authorities to ensure that regulations governing re-hypothecation of client assets address certain disclosure requirements and limitations to rehypothecation and re-use of collateral assets, and a recommendation to regulators for non-bank entities that engage in securities lending to adopt 'minimum regulatory standards' for collateral valuation and management. The FSB also issued a public consultation on its proposed regulatory framework for haircuts on non-centrally cleared securities financing transactions (Annex 2 of the Policy).

Structural Elements – the FSB made two final recommendations relating to the structural elements of the securities financing market. In relation to the use of central counterparties ("CCPs") for securities financing transactions, the FSB believes that there is a case for the wider use of such arrangements, but the final outcome has been left to the national regulators to evaluate.

The consultation on the proposed regulatory framework for haircuts and numerical floors is open until November 28, 2013, and J.P. Morgan is working with various industry associations/bodies in order to reply to the consultation. Other Regulatory Headlines

European Commission – Publication on Shadow Banking – The European Commission ("EC") published its Communication on Shadow Banking in early September. The document signaled the intent of the EC to present a Securities Law Legislation that would cover asset reuse, collateral and re-hypothecation in the securities financing market. In addition, the document contains a proposed regulation on Money Market Funds, which would be in addition to any requirements under the current UCITS directives.


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