ICMA advises on daily average-based leverage reporting
15 March 2019 London
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In order to smooth excessive volatility around reporting dates, the International Capital Market Association (ICMA) European Repo and Collateral Council (ERCC) committee have suggested the introduction of daily average-based leverage reporting.
ICMA made this suggestion in response to the Basel Committee on Banking Supervision (BCBS) consultation on “Revisions to Leverage Ratio Disclosure Requirements”.
ICMA’s response focused particularly on the treatment of securities financing transactions (SFTs) and looked to others to comment on the full range of questions, which the consultation raises.
While ICMA is supportive of the daily average-based leverage reporting proposal and noted that the present state of affairs serves to disguise risks that the market is running, they have concerns about excessive restrictions in the repo market.
Accordingly, ICMA highlighted the importance of the BCBS revisiting the recommendations presented in the ICMA ERCC’s, 6 July 2016, response letter to the BCB.
In the response, ICMA wrote: “This is necessary in order to safeguard the provision of sufficient market capacity and repo availability, particularly when considering the future market environment with less accommodative monetary policy, thereby averting the risk that currently witnessed quarter-end dislocations become the norm.”
The impact of pressures on the repo market has been significant but the market’s ability to adapt and absorb these pressures on a day-to-day basis is currently performing well, ICMA revealed.
However, there have been times, particularly around reporting dates, where the market has been under stress, which could lead to negative implications for the smooth functioning of the broader financial markets, ICMA stated.
It was outlined that this could lead to increased costs and risk for market participants, including those corporates and governments borrowing to finance their economic needs.
Consequently, there is a case for a further detailed, careful review of the overall coherence and calibration of the post-crisis regulation framework.
There are a number of ways for the details to be calibrated, ICMA suggested including changes to the mechanics of the leverage ratio, in order to better smooth its effects on repo and collateral markets.
In the concluding remarks, ICMA reinforced this: “Accordingly, alongside changing the Pillar 3 disclosure requirements as proposed in relation to securities financing transactions, which we fully support, there needs to be a further detailed assessment of the impact of the leverage ratio on repo and collateral markets.”
ICMA made this suggestion in response to the Basel Committee on Banking Supervision (BCBS) consultation on “Revisions to Leverage Ratio Disclosure Requirements”.
ICMA’s response focused particularly on the treatment of securities financing transactions (SFTs) and looked to others to comment on the full range of questions, which the consultation raises.
While ICMA is supportive of the daily average-based leverage reporting proposal and noted that the present state of affairs serves to disguise risks that the market is running, they have concerns about excessive restrictions in the repo market.
Accordingly, ICMA highlighted the importance of the BCBS revisiting the recommendations presented in the ICMA ERCC’s, 6 July 2016, response letter to the BCB.
In the response, ICMA wrote: “This is necessary in order to safeguard the provision of sufficient market capacity and repo availability, particularly when considering the future market environment with less accommodative monetary policy, thereby averting the risk that currently witnessed quarter-end dislocations become the norm.”
The impact of pressures on the repo market has been significant but the market’s ability to adapt and absorb these pressures on a day-to-day basis is currently performing well, ICMA revealed.
However, there have been times, particularly around reporting dates, where the market has been under stress, which could lead to negative implications for the smooth functioning of the broader financial markets, ICMA stated.
It was outlined that this could lead to increased costs and risk for market participants, including those corporates and governments borrowing to finance their economic needs.
Consequently, there is a case for a further detailed, careful review of the overall coherence and calibration of the post-crisis regulation framework.
There are a number of ways for the details to be calibrated, ICMA suggested including changes to the mechanics of the leverage ratio, in order to better smooth its effects on repo and collateral markets.
In the concluding remarks, ICMA reinforced this: “Accordingly, alongside changing the Pillar 3 disclosure requirements as proposed in relation to securities financing transactions, which we fully support, there needs to be a further detailed assessment of the impact of the leverage ratio on repo and collateral markets.”
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