HQLA demand on the rise, says ICMA
30 September 2016 London
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The impending implementation of money market reforms has already begun to change market behaviour by instigating a flight to quality, according to the International Capital Market Association (ICMA).
The results of the 31st ICMA European Repo Market Survey revealed that the share of collateral represented by government securities, which are considered high-quality liquid assets (HQLAs), jumped to 85.8 percent from 78.6 percent of the European fixed income collateral.
“The most likely cause [of the rise in government securities use] is the forthcoming implementation of reforms to money market mutual funds in the US in October, which is encouraging many prime funds to transform themselves into government securities funds in order to avoid more onerous operating conditions,” ICMA explained.
“Some European banks have been reliant on US funds for a significant share of their US dollar funding. But money market mutual fund regulation may not be the only factor. Demand for government securities is also buoyant because of the need for HQLAs to meet liquidity requirements.”
“This seems to have been driving a recovery in the share of German government bonds,” ICMA added.
For this survey, ICMA asked 67 offices from 63 financial institutions, mainly banks, throughout Europe for the value of the cash side of repo and reverse repo contracts still outstanding at close of business on 8 June 2016.
The survey’s results highlighted the continued downward trend of the overall value of the European repo market.
The baseline figure for market size hit €5.38 trillion, representing a 4.1 percent decrease on the December 2015 figure of €5.6 trillion and a year-on-year decrease of 1.6 percent from the survey in June 2015.
According to ICMA, the decline in the baseline figure largely reflects the reduced number of survey participants, of which there were five less. However, a comparison of a constant sample of survey participants shows a small, largely seasonal, rise of 0.5 percent since December but a year-on-year decline of 1.6 percent, confirming that repo activity continues to decline.
ICMA also noted that although most institutions provided data for their entire European repo business, others only provided separate returns for one or more, but not necessarily all, of their European offices.
Godfried De Vidts, chair of ICMA’s European Repo and Collateral Council (ERCC), commented: “Repo markets have been subjected to regulatory and prudential measures that taken all together may jeopardise the real economic benefit of this product.”
“But, as we embark on mandatory clearing for over-the-counter derivatives, adding buy-side clients, the impact of this regulation is not always clear. The ERCC has always encouraged transparency and we look forward to continuing our constructive work with regulators to make sure these market signals are captured correctly and appropriate measures taken.”
The results of the 31st ICMA European Repo Market Survey revealed that the share of collateral represented by government securities, which are considered high-quality liquid assets (HQLAs), jumped to 85.8 percent from 78.6 percent of the European fixed income collateral.
“The most likely cause [of the rise in government securities use] is the forthcoming implementation of reforms to money market mutual funds in the US in October, which is encouraging many prime funds to transform themselves into government securities funds in order to avoid more onerous operating conditions,” ICMA explained.
“Some European banks have been reliant on US funds for a significant share of their US dollar funding. But money market mutual fund regulation may not be the only factor. Demand for government securities is also buoyant because of the need for HQLAs to meet liquidity requirements.”
“This seems to have been driving a recovery in the share of German government bonds,” ICMA added.
For this survey, ICMA asked 67 offices from 63 financial institutions, mainly banks, throughout Europe for the value of the cash side of repo and reverse repo contracts still outstanding at close of business on 8 June 2016.
The survey’s results highlighted the continued downward trend of the overall value of the European repo market.
The baseline figure for market size hit €5.38 trillion, representing a 4.1 percent decrease on the December 2015 figure of €5.6 trillion and a year-on-year decrease of 1.6 percent from the survey in June 2015.
According to ICMA, the decline in the baseline figure largely reflects the reduced number of survey participants, of which there were five less. However, a comparison of a constant sample of survey participants shows a small, largely seasonal, rise of 0.5 percent since December but a year-on-year decline of 1.6 percent, confirming that repo activity continues to decline.
ICMA also noted that although most institutions provided data for their entire European repo business, others only provided separate returns for one or more, but not necessarily all, of their European offices.
Godfried De Vidts, chair of ICMA’s European Repo and Collateral Council (ERCC), commented: “Repo markets have been subjected to regulatory and prudential measures that taken all together may jeopardise the real economic benefit of this product.”
“But, as we embark on mandatory clearing for over-the-counter derivatives, adding buy-side clients, the impact of this regulation is not always clear. The ERCC has always encouraged transparency and we look forward to continuing our constructive work with regulators to make sure these market signals are captured correctly and appropriate measures taken.”
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