Watchdog FSB Waters Down Proposals on Shadow Bank Leverage

(Bloomberg) — The world’s most powerful financial watchdog has watered down proposals for greater transparency around shadow banks’ borrowings and increased cross-border data sharing over emerging risks from leverage in hedge funds, asset managers, insurers and other non-banks. 

In a report delivered to the Group of 20 nations on Wednesday, the Financial Stability Board said that any minimum standards for disclosures on non-banks’ financial situations would be developed “in partnership with industry” and would “be designed to protect the confidentiality of sensitive information of leveraged nonbanks.”

The recommendations, made ahead of next week’s meeting of G-20 finance ministers and central bankers, are the culmination of almost five years of work on an area that regulators including FSB Chair and Bank of England Governor Andrew Bailey have described as key to safeguarding the modern global financial system.    

They come against a fraught backdrop, as the Trump administration in the US continues to inspire a global deregulatory push that has seen agencies shuttered, new initiatives abandoned and promises to review rules that constrain growth. 

The original package, published for consultation in December, drew 34 responses, including from BlackRock Inc., insurer Liberty Group and lobby groups ranging from hedge funds to asset managers and other capital markets players in the non-bank industry. Several of the responses highlighted issues with standardized financial disclosures, which would be made between firms and not publicly available.

“Some of the feedback was on trying to be more balanced in our presentation of leverage,” said John Schindler, Secretary General of the FSB, in a public briefing in London. “We talked about the risks, but we tried to introduce more about the benefits.”

Dash for Cash

The FSB’s final report also softened proposals for “proactive” cross-border information sharing so that such engagement would only take place “where they determine that doing so would assist in their ability to identify and assess relevant cross-border risks.”

The proposals on disclosures and cross border co-operation are among a laundry list of nine recommendations to mitigate future non-bank stresses like the March 2020 dash for cash and the implosion of Bill Hwang’s $36 billion family office Archegos Capital Management. 

Authorities can pick and choose which rules to apply depending on “jurisdiction-specific circumstances,” the Basel, Switzerland-based FSB said, as it shied away from more dramatic measures like proposals to limit hedge fund leverage. 

The original package also included a contentious proposal designed to cap the leverage non-banks can accumulate in bond markets. So-called minimum haircuts would see regulators enforce lower-than-market valuations on assets used to back a repo transaction.

While the FSB’s final report said regulators should still consider imposing minimum haircuts, it acknowledged that such repos may be subject to portfolio margining and that regulators should consider that.

Waning Enthusiasm 

Officials involved in the work have privately complained about difficulty getting data from firms and from national authorities on some of the most secretive areas of Wall Street. Waning political enthusiasm for new regulatory initiatives also weighed on the efforts. 

“International cooperation on the implementation of the policy measures is critical to mitigate cross-border spillovers and avoid regulatory arbitrage,” the FSB said as it announced the proposals.

The FSB also said on Wednesday that it has created a special taskforce, to be chaired by Bailey, to investigate those data issues. It added that its first “test case” will be leveraged bets on sovereign bonds, including the trillion dollar Treasuries basis trade, as previously reported by Bloomberg News. It will publish a report on that area by mid-2026. The FSB will do a deep dive into private credit as well.

Separately, the BOE on Wednesday warned that financial stability risks from leveraged hedge fund strategies in gilts is growing. It said a “small number” of hedge funds account for 90% of a record £77 billion ($105 billion) borrowing via gilt repo agreements, meaning an unwinding of that trade by a few key players could reverberate through UK markets.

(Updates with comment from FSB’s Schindler in sixth paragraph.)

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