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European financial institutions must report shadow banking activity

EU financial institutions will have to report 'shadow banking' transactions, or trading done outside the regulated banking sector, under new regulations adopted by the Council of the EU. 18 Nov 2015

The measures were first proposed by the European Commission in 2014, and aim to prevent trading activities developing outside the regulated banking system, without proper oversight. The scale of shadow banking is "alarming, having already been estimated to amount to close to half of the regulated banking system", the Council said.

The new reporting requirements will ensure that information on securities financing transactions is properly reported to trade repositories and investors in collective investments, it said.

Securities financing transactions are transactions that use assets belonging to the counterparty to generate financing. This can involve lending or borrowing securities or commodities or repurchase of reverse purchase transactions, the Council said.

The new rules will improve transparency in three areas, the Council said. It will allow the monitoring of any build up of systemic risks, and will let investors know when their assets are being used in transactions. It will also force banks or brokers to show whether they are using clients' collateral for their own purposes.

An agreement on the text was reached with the European Parliament in June, and the Parliament adopted its position in October. The law will now take effect 20 days after it is published in the EU official journal.

The Financial Stability Board (FSB) said last week that the shadow banking sector grew by US$1.6 trillion last year to be worth $80 trillion internationally, while the European Central Bank recently said that the sector is an increasingly important provider of funding in the euro area economy, and that regulators must adapt their approach to deal with it.

Last year the International Monetary Fund (IMF) urged regulators to improve their oversight of the shadow banking sector, saying that it is "both a boon and a bane for countries".