EU WEIGHS CURBS ON BANKS’ USE OF CLIENT ASSETS AS COLLATERAL!!! Europe Opens $80 Trillion Shadow Banking Pandora’s Box!!!
May 24th, 2013
Europe Opens $80 Trillion Shadow Banking Pandora’s Box: Will Seek To Collapse “Collateral Chains”
EU Weighs Curbs on Banks’ Use of Client Assets as Collateral
Banks and brokers face a clampdown on using assets they hold for clients as collateral for their own trades as part of European Union moves to bolster market stability and rein in shadow banking.
The European Commission is weighing whether firms should have to obtain formal consent from their clients before being allowed to reuse assets to back other trades, according to a document obtained by Bloomberg News. The consent would be enshrined in a “contractual agreement” between the parties.
The handing over of collateral is an integral part of repurchase agreements, or repos — one of the activities under review by global regulators as part of their efforts to regulate shadow banking. The reuse of clients’ assets poses a potential threat to financial stability should one of a chain of firms that handled the securities go bankrupt, according to the document prepared by commission officials and dated May 15. Uncertainty about who holds an asset can fuel panic in times of market stress, according to the paper.
“Complex” chains of collateral can make it difficult for investors to “identify who owns what, where risk is concentrated and who is exposed to whom,” according to the document. “This has consequences for transparency and financial stability.”
Under the plans being weighed by the commission, banks and brokers holding securities for clients wouldn’t be allowed to reuse the assets for trading on their own account — speculation on the markets aimed solely at boosting their own revenues, according to the document.