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Banks voice 'serious concern' over funding rules on shorts and swaps

Published:Wednesday | September 3, 2014 | 9:00 AM

By Sam Fleming in London

Banks are sounding the alarm about a proposed global rule aimed at forcing them to fund themselves more safely, warning that it could have "severe" knock-on effects on short selling and other important equities market transactions.

Industry lobbyists have warned the Basel Committee on Banking Supervision that proposed funding rules could make it five times more expensive for banks to facilitate short selling, in which investors bet that share prices will fall.

The rule would also make it much more expensive for banks to provide equity swaps, according to the letter from the Global Financial Markets Association and the Institute of International Finance, two global lobbying groups.

If other financial institutions, so-called shadow banks, do not step into the breach, investors could be forced to pay more to bet on equity price moves.

The banks also warn that the rules would impair the functioning of the equity swaps market, and boost costs associated with investment in equity indices.

They are making a last-ditch effort to modify the net stable funding ratio, seen as the final plank of the 'Basel III' banking reforms that seek to prevent a repeat of the 2008 financial crisis.

The NSFR aims to ensure banks hold a minimum amount of stable funding based on the characteristics of their assets. The measure is expected to come into force in 2018.

It comes alongside a liquidity coverage ratio ensuring banks hold enough assets such as government bonds that can easily be converted into cash. Global regulators in January issued revised proposals for the NSFR, saying it was an essential component of the Basel III reforms.

The banks' letter, sent to the Switzerland-based Basel Committee on Friday, says banks have "serious concerns" about the treatment of equities under the NSFR regime, saying it could "significantly increase transaction costs across equity markets for all participants".

The letter cites research by Oliver Wyman, a consultancy, which homes in on areas such as securities lending, which is used to facilitate short selling. Some US$760bn of equity securities were out on loan at the end of 2013, the study says.

The analysis finds that the NSFR could drive up the cost of covering a short position, making it four to five times greater than the current burden.

(c) 2014 The Financial Times Limited