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Priority 5: Ensure Further Upcoming Potential Mandatory Haircuts
on SFTs are Fit for Purpose & Fully Informed by Complete Data Sets
on SFT Markets

The 2017 Basel III package includes a standard that would introduce mandatory haircuts to SFTs, including securities
lending/borrowing, in the bank capital framework. The EC has committed to proposed legislation in order to implement
this package in the EU in 2020.

ISLA does not support a mandatory haircut approach, as we We agree with the recent European Banking Authority (EBA)
believe leverage and procyclicality in the non-banking sector can advice on the implementation of the final Basel III package in the
be better addressed through more risk-sensitive approaches. EU which, building on earlier analysis by the EC, ESMA, and the
Mandatory haircuts in securities borrowing transactions have European Systemic Risk Board, recommends to hold off with the
a high potential of disincentivising market making and could transposition of mandatory haircuts in the EU at this stage. We
therefore hurt liquidity in the CMU. equally agree with the EBA that leverage risks in the non-banking
sector should be addressed through market legislation, and not
bank prudential legislation.

Key Recommendations on Mandatory Prudential Haircuts for Securities Lending:
To address the current data gap challenges faced by regulators and the industry, largely due to the absence of a common
global approach to the reporting of SFTs, EU policy makers:
1 Should avoid imposing mandatory minimum haircuts on securities lending transactions, as they will now in our view,
help to address potential build-up or procyclicality of leverage in the non-banking sector.

2 Should a mandatory approach be adopted, it should a) not be implemented until other initiatives to ensure adequate and
complete data reporting are in place (see above), and b) be introduced through market legislation, not via the planned
2020 bank capital package, as this is not the best vehicle to consider this question.