US Treasury and RMA join forces on new securities lending tax guidance
16 October 2019 RMA 2019
Image: Shutterstock
The Risk Management Association (RMA) is hopeful that a recent meeting with senior figures at the US Department of the Treasury will result in new guidance on the current interpretation of historic tax laws that are at odds with the aims of the market鈥檚 post-crisis regulations.
The RMA鈥檚 Tax Committee to highlight its concerns that a lack of clear and up-to-date guidance on Section 1058 of the Internal Revenue Code is causing friction with the regulatory push towards term trades.
In the letter, the RMA noted that 鈥渢he current uncertainty with respect to the Section 1058 eligibility of fixed-term securities loans generally results in many securities lenders refraining from such lending activity, thereby diminishing liquidity in a segment of the capital markets encouraged by the financial regulations discussed above鈥�.
It is this drain on market liquidity that the RMA is ideally seeking to resolve as it patently runs against the aims of US and international regulators to create a more stable market environment.
Since the liquidity coverage ratio was fully implemented in 2015 as part of Basel III鈥檚 bundle of new regulatory requirements for banks, the RMA has observed that it is driving borrowers into longer-term securities lending transactions, meaning terms that go from 30 days to up to a year.
However, the move away from short-term funding is seen in stark contrast with the current interpretation of the tax rules under Section 1058, which does not include fixed-term lending.
Speaking on the RMA鈥檚 Association Update panel yesterday, George Rapalje, the chair of the association鈥檚 Tax Committee and head of tax for securities finance at State Street, told delegates that the Treasury had responded to the letter by inviting the committee to Washington to meet senior figures and discuss the issue in more detail.
Rapalje explained that following the meeting the US Treasury fully understood the issue and the significance of it.
However, Rapalje added that the Treasury was also candid in outlining the myriad other issues currently on its docket, of which drafting new guidance on Section 1058 was not a top priority.
As a result, Rapalje said he is hopeful that he will see movement on the issue within the next six to 12 months but doesn鈥檛 expect the desired guidance to be produced earlier than 18 to 24 months from now.
鈥淚t鈥檚 a long term project and we won鈥檛 fix 40 years of tax law in a few months,鈥� he concluded.
The RMA鈥檚 Tax Committee to highlight its concerns that a lack of clear and up-to-date guidance on Section 1058 of the Internal Revenue Code is causing friction with the regulatory push towards term trades.
In the letter, the RMA noted that 鈥渢he current uncertainty with respect to the Section 1058 eligibility of fixed-term securities loans generally results in many securities lenders refraining from such lending activity, thereby diminishing liquidity in a segment of the capital markets encouraged by the financial regulations discussed above鈥�.
It is this drain on market liquidity that the RMA is ideally seeking to resolve as it patently runs against the aims of US and international regulators to create a more stable market environment.
Since the liquidity coverage ratio was fully implemented in 2015 as part of Basel III鈥檚 bundle of new regulatory requirements for banks, the RMA has observed that it is driving borrowers into longer-term securities lending transactions, meaning terms that go from 30 days to up to a year.
However, the move away from short-term funding is seen in stark contrast with the current interpretation of the tax rules under Section 1058, which does not include fixed-term lending.
Speaking on the RMA鈥檚 Association Update panel yesterday, George Rapalje, the chair of the association鈥檚 Tax Committee and head of tax for securities finance at State Street, told delegates that the Treasury had responded to the letter by inviting the committee to Washington to meet senior figures and discuss the issue in more detail.
Rapalje explained that following the meeting the US Treasury fully understood the issue and the significance of it.
However, Rapalje added that the Treasury was also candid in outlining the myriad other issues currently on its docket, of which drafting new guidance on Section 1058 was not a top priority.
As a result, Rapalje said he is hopeful that he will see movement on the issue within the next six to 12 months but doesn鈥檛 expect the desired guidance to be produced earlier than 18 to 24 months from now.
鈥淚t鈥檚 a long term project and we won鈥檛 fix 40 years of tax law in a few months,鈥� he concluded.
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