GFF: Pension funds left high and dry
25 January 2017 Luxembourg
Image: Shutterstock
Month-end liquidity pools are drying up and pensions funds are most at risk, according to a panellist speaking in Luxembourg.
Roelof Van der Struik of PGGM revealed at the Deutsche Börse Global Funding and Financing Summit that he found it more difficult to balance the books each month in the second half of 2016, due to a lack of market liquidity.
This problem was also amplified significantly at year's end, he explained.
Van der Struik said: "I really hope that some liquidity comes back to the bilateral repo market, which is being disproportionately affected. We will need this market in the future."
The recently extended public sector purchase programme of the European Central Bank (ECB) was accused of being a major factor behind the repeated droughts, during the panel discussion.
Stifling reporting requirements and unfair risk mitigation rules were also highlighted as contributory factors.
Data analysis by the International Securities Lending Association appears to reinforce the theory that the ECB's prolific hoarding of government bonds, with only a limited lending programme, is a contributing factor to dwindling liquidity, according to the panel.
An ECB representative on the panel acknowledged a nominal liquidity drop but denied that liquidity had sunk to dangerous levels. It was also clarified that the purchase programme was devolved to national central banks at an operational level, and that there was some disparity in their commitment to the programme.
"We have the feel that the securities lending programme has been well received by the market," stated the ECB panellist.
"We monitor our repo and securities lending programme very closely. The market needs to adapt and be innovative to survive in these difficult times."
The ECB recently revised its lending rules for eurosystem central banks to allow for cash collateral to be reinvested more liberally, as of 15 December.
The central banks of Europe, Germany, Ireland, France and Belgium have all since opened their lending programmes to cash collateral, along with Spain and the Netherlands.
The ECB set the overall limit for lending against cash collateral at €50 billion.
In a statement on the revised rules, the ECB said: “To avoid unduly curtailing normal repo market activity, the cash collateral option will be offered at a rate equal to the lower of the rate of the deposit facility, minus 30 basis points (bps), currently -70 bps, and the prevailing market repo rate.
Turning to the regulations that are putting downward pressure on overall liquidity, the panel cited the US Federal Reserve-backed single counterparty credit limits, which are built upon the initial rules laid down in the Dodd-Frank Act.
A global systemically important bank must now apply a 15-percent cap to its tier-one exposure to any other similar ranked bank, and a 25-percent cap on its tier-one exposure to other counterparties.
Several panellists noted that the limited number of counterparties in the securities lending market means that this rule disproportionately penalises their area of the market.
The burdensome reporting requirements of the Securities Financing Transaction Regulation, among other frameworks, were also held up as forces driving participants out of the market by making the cost of lending uneconomical.
Roelof Van der Struik of PGGM revealed at the Deutsche Börse Global Funding and Financing Summit that he found it more difficult to balance the books each month in the second half of 2016, due to a lack of market liquidity.
This problem was also amplified significantly at year's end, he explained.
Van der Struik said: "I really hope that some liquidity comes back to the bilateral repo market, which is being disproportionately affected. We will need this market in the future."
The recently extended public sector purchase programme of the European Central Bank (ECB) was accused of being a major factor behind the repeated droughts, during the panel discussion.
Stifling reporting requirements and unfair risk mitigation rules were also highlighted as contributory factors.
Data analysis by the International Securities Lending Association appears to reinforce the theory that the ECB's prolific hoarding of government bonds, with only a limited lending programme, is a contributing factor to dwindling liquidity, according to the panel.
An ECB representative on the panel acknowledged a nominal liquidity drop but denied that liquidity had sunk to dangerous levels. It was also clarified that the purchase programme was devolved to national central banks at an operational level, and that there was some disparity in their commitment to the programme.
"We have the feel that the securities lending programme has been well received by the market," stated the ECB panellist.
"We monitor our repo and securities lending programme very closely. The market needs to adapt and be innovative to survive in these difficult times."
The ECB recently revised its lending rules for eurosystem central banks to allow for cash collateral to be reinvested more liberally, as of 15 December.
The central banks of Europe, Germany, Ireland, France and Belgium have all since opened their lending programmes to cash collateral, along with Spain and the Netherlands.
The ECB set the overall limit for lending against cash collateral at €50 billion.
In a statement on the revised rules, the ECB said: “To avoid unduly curtailing normal repo market activity, the cash collateral option will be offered at a rate equal to the lower of the rate of the deposit facility, minus 30 basis points (bps), currently -70 bps, and the prevailing market repo rate.
Turning to the regulations that are putting downward pressure on overall liquidity, the panel cited the US Federal Reserve-backed single counterparty credit limits, which are built upon the initial rules laid down in the Dodd-Frank Act.
A global systemically important bank must now apply a 15-percent cap to its tier-one exposure to any other similar ranked bank, and a 25-percent cap on its tier-one exposure to other counterparties.
Several panellists noted that the limited number of counterparties in the securities lending market means that this rule disproportionately penalises their area of the market.
The burdensome reporting requirements of the Securities Financing Transaction Regulation, among other frameworks, were also held up as forces driving participants out of the market by making the cost of lending uneconomical.
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