Preparation, caution and improved NCB lending saves year-end repo
16 January 2018 London
Image: Shutterstock
The improved securities lending programmes of EU national central banks (NCBs) has been praised by the industry as a crucial antidote to the year-end liquidity woes last month, according to the International Capital Market Association (ICMA).
In its first market report on the EU repo market for 2018, ICMA commented: “One of the notable changes since the end of 2016 is the improvement in the various European Central Bank (ECB) and NCB lending facilities, which has made it easier, and more incentivised, for banks to borrow bonds bought up in the public sector purchase programme (PSPP).”
“In particular, a number of market participants have commented on the improved accessibility of the Bundesbank’s lending facility.”
ICMA added: “While total borrowing levels had remained relatively stable in the lead-up to year-end, it has been suggested that the December numbers, when published later in January 2018, should see a large increase, and most likely being driven by increased borrowing of German and French bonds.”
According to ICMA, as part of its survey for the report one dealer commented that “the main market issue with the lending facilities is the counterparty credit lines of the NCBs, in particular the Bundesbank and Banque de France, and that this is potentially becoming the main constraint to utilising the facility”.
ICMA explained: “It has been suggested that credit line constraints could have been one of the contributing factors that saw French specials tighten so aggressively.”
Along with the improved securities lending programmes, ICMA also attributed the avoidance of a repeat of 2016’s year-end liquidity crunch to market positioning, specifically, fewer open shorts in sovereign (mainly German) bonds and a break-down in the correlation between repo rates and the cross-currency basis, which ICMA noted had normalised by late December.
At the same time, there was a greater awareness of the liquidity risk posed by the new post-PSPP market landscape, and a subsequent improvement in preparation.
ICMA highlighted that that firms were understood to be focusing on their potential year-end fund needs as early as September and October, and, “where possible, paid-up to lock-in for term over year-end, rather than rolling day-to-day”.
“Meanwhile, it has been suggested that this time many buy-side holders of bonds had been reluctant to lend too far in advance of year-end, fearing that they would miss the potential exaggerated lending levels of the previous year, which in turn meant that there was more supply as year-end approached,” ICMA added.
Commenting on the report’s findings, Godfried De Vidts, chair of ICMA’s European Repo and collateral Council (ERCC) said: “This update on year-end pressure on the repo market contributes to the overall mission of the ERCC, which strives to ensure that market participants can finance the real economy as effectively as possible.”
“The ERCC’s semi-annual repo survey shows trends; enhancing market infrastructure issues has always been high on the agenda; and the legal robustness and protection afforded by the global master repo agreement is core to the well being of the international repo market.”
In its first market report on the EU repo market for 2018, ICMA commented: “One of the notable changes since the end of 2016 is the improvement in the various European Central Bank (ECB) and NCB lending facilities, which has made it easier, and more incentivised, for banks to borrow bonds bought up in the public sector purchase programme (PSPP).”
“In particular, a number of market participants have commented on the improved accessibility of the Bundesbank’s lending facility.”
ICMA added: “While total borrowing levels had remained relatively stable in the lead-up to year-end, it has been suggested that the December numbers, when published later in January 2018, should see a large increase, and most likely being driven by increased borrowing of German and French bonds.”
According to ICMA, as part of its survey for the report one dealer commented that “the main market issue with the lending facilities is the counterparty credit lines of the NCBs, in particular the Bundesbank and Banque de France, and that this is potentially becoming the main constraint to utilising the facility”.
ICMA explained: “It has been suggested that credit line constraints could have been one of the contributing factors that saw French specials tighten so aggressively.”
Along with the improved securities lending programmes, ICMA also attributed the avoidance of a repeat of 2016’s year-end liquidity crunch to market positioning, specifically, fewer open shorts in sovereign (mainly German) bonds and a break-down in the correlation between repo rates and the cross-currency basis, which ICMA noted had normalised by late December.
At the same time, there was a greater awareness of the liquidity risk posed by the new post-PSPP market landscape, and a subsequent improvement in preparation.
ICMA highlighted that that firms were understood to be focusing on their potential year-end fund needs as early as September and October, and, “where possible, paid-up to lock-in for term over year-end, rather than rolling day-to-day”.
“Meanwhile, it has been suggested that this time many buy-side holders of bonds had been reluctant to lend too far in advance of year-end, fearing that they would miss the potential exaggerated lending levels of the previous year, which in turn meant that there was more supply as year-end approached,” ICMA added.
Commenting on the report’s findings, Godfried De Vidts, chair of ICMA’s European Repo and collateral Council (ERCC) said: “This update on year-end pressure on the repo market contributes to the overall mission of the ERCC, which strives to ensure that market participants can finance the real economy as effectively as possible.”
“The ERCC’s semi-annual repo survey shows trends; enhancing market infrastructure issues has always been high on the agenda; and the legal robustness and protection afforded by the global master repo agreement is core to the well being of the international repo market.”
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