Exchange-traded funds targeted in EU shadow-bank clampdown

Tighter Collateral Rules

Options being weighed by the commission include tightening rules on the collateral that banks and other firms managing ETFs have to provide when carrying out derivatives trades, the commission said.

The regulator is also considering how to address conflicts of interest that arise when the bank that manages an ETF is also the fund’s counterparty on a derivatives trade, the commission said.

“Shadow banking poses particular challenges for regulators who must address the potential systemic risk posed by entities that undertake bank-like activities” without “undermining the benefits they bring in diversifying risks and supporting economic growth,” said Simon Lewis, chief executive officer of the Association for Financial Markets in Europe,

AFME represents lenders and brokers including Goldman Sachs Group Inc., Bank of America Corp., Deutsche Bank AG and BNP Paribas SA.

Money Market Funds

The Commission will seek views on today’s plans before deciding whether to press ahead with legislation.

Other shadow banks being targeted for new rules include money-market funds and insurers, the commission said.

Barnier said he’s concerned lenders may resort to securitizations, repos and other shadow-banking measures to evade higher capital requirements and limits on bank indebtedness that have been agreed on by global regulators. The measures were drawn up by the Basel Committee on Banking Supervision to prevent a re-run of the financial crisis.

“What we do not want is for financial activities and entities to circumvent existing and foreseen rules,” Barnier said.

One measure known as a “large exposure rule” may be expanded to further limit the amount of business a bank can undertake with any single counterparty, the commission said.

The regulatory crackdown on shadow banking presents “a danger of demonizing activities which could be vitally important in the provision of credit to struggling economies,” Reid said.

Bloomberg News

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