Response to consultation on Guidelines on limits on exposures to shadow banking

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2. Do you agree with the approach the EBA has proposed for the purposes of establishing effective processes and control mechanisms? If not, please explain why and present possible alternatives.

Although we support the approach taken to allow firms to rely on their own internal framework and risk appetite to set internal limits and although we acknowledge that this is a possibility foreseen in Article 395 para 2 CRR, we continue to question the overall proposal to establish aggregate limits as we do not consider this a sectoral risk. This could be better addressed via other means such as the ICAAP/Pillar 2 assessment, which specifically covers concentration risk rather than the large exposure regime which is intended to address default of single/groups of connected counterparties.

It is also important that the requirement for establishing effective process and effective mechanisms should be applied on a consolidated basis only, so as to be consistent with the firm’s approaches to systems and control more generally and to ensure that the requirement is not disproportionately burdensome.

3. Do you agree with the approach the EBA has proposed for the purposes of establishing appropriate oversight arrangements? If not, please explain why and present possible alternatives.

State Street agrees with the proposed approach. However, sufficient time for the implementation of these requirements should be granted.

4.Do you agree with the approaches the EBA has proposed for the purposes of establishing aggregate and individual limits? If not, please explain why and present possible alternatives.

State Street does not agree with the proposed approaches. As highlighted above, we question the proposal to establish an aggregate limit, given that the EBA mandate for developing these guidelines, as set out in the CRR, explicitly refers to setting either aggregate or individual limits. Therefore in proposing both aggregate and individual limits, in our view, the draft guidelines exceed the CRR mandate.

Furthermore, should the EBA decide to introduce such limits, we would strongly recommend providing for an exemption for certain custody-related services. Custody banks play a key role in the smooth functioning of global financial markets by facilitating payments in relation to the settlement of securities, foreign exchange, derivative, commodity and other market transactions. As part of this custodial function, custody banks provide temporary liquidity to market participants, extending, for example, provisional credit to institutional investors to smooth timing differences between the making and receiving of payments in connection with the settlement of a securities transaction, or providing overdrafts in relation to securities settlement delays or fails. Such extensions of credit are typically intraday, but can extend multiple days as well. These provisional extensions of credit may be large, but are always short-term, and are typically secured by a lien on the assets of the institutional investor. Similarly, custody banks may receive excess liquidity from market participants, through deposits from institutional investors related to securities sales, income received, or other operational activities. Such excess liquidity is typically placed by custody banks on a short-term basis with central banks. Applying the exposure limits to custody related limits would impact the ability of custody banks to provide these types of credit exposures which would lead to implications for the smooth functioning of the global payment and settlement system. It would also be incoherent to require managers of alternative funds and of UCITS funds to appoint depositaries which however are subject to restrictions and limitations of their capacity to provide the necessary custody services. There is regulatory precedent for treating such short-term, operational exposures differently than other credit exposures, including within the Capital Requirements Directive itself which recognizes the need for flexible treatment of operational and payments-related exposures. We would urge the EBA to follow a similar approach should exposure limits to shadow banking be introduced.

Similarly, we would encourage the EBA to consider the treatment of exposures related to central clearing activities. The revised EU capital framework provides for the preferential treatment of such exposures. Including them into the proposed exposure limits would therefore be contrary to the approach taken in the wider capital framework.

5. Do you agree with the fallback approach the EBA has proposed, including the cases in whichit should apply? If not, please explain why and present possible alternatives. Do you think that Option 2 is preferable to Option 1 for the fallback approach? If so, why? In particular: Do you believe that Option 2 provides more incentives to gather information about exposures than Option 1? Do you believe that Option 2 can be more conservative than Option 1? If so, when? Do you see some practical

The inclusion of a ‘fallback’ approach runs the risk of setting a de facto limit of 25% should banks be unable to meet the data requirements that would enable them to use the principle approach by 1 January 2016.

Should the EBA nevertheless decide to introduce a fall back approach, it should only require an individual limit and not an aggregate limit. If an aggregate limit is still introduced, we would strongly recommend setting it higher than 25%. In order to ensure an appropriate limit is set and one which does not stifle the financing of the real economy, we strongly urge that a full impact assessment is carried out. In addition we would suggest a staged implementation on the basis of a Quantitative Impact Study (“QIS”) for setting limits.

With regards to the options proposed by the EBA, State Street prefers option 2. Option 1 is unnecessarily restrictive as it does not recognise that firms might have information on some of their exposures to shadow banking entities but on all of them. Option 2 instead would allow firms to use the principal approach and therefore provides incentives for firms to collect information their exposures to shadow banking entities.

6. Taking into account, in particular, the fact that the 25% limit is consistent with the currentlimit in the large exposures framework, do you agree it is an adequate limit for the fallback approach? If not, why? What would the impact of such a limit be in the case of Option 1? And in the case of Option 2?

Setting a clear limit to shadow banking would introduce for the first time a sectoral exposure limit and set a precedent. We do not believe that this is the right approach to follow and we would like to reemphasize that the EBA’s mandate in the CRR does not require the setting of such an aggregate limit (see also our response to Question 4).

With regards to the limit of 25% itself, it is not possible to comment on its suitability; we therefore consider it essential that a full EU QIS is undertaken before such a limit is introduced. A QIS would also address the general concerns with regards to the impact limits may have on the financing of the real economy.

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State Street Corporation