GFF: Central clearing in Europe still requires a lot of work
30 January 2025 Luxembourg
Image: Daniel_Tison
Central clearing in Europe has been a slow process and there is still a lot of work that needs to be done, according to panellists at Deutsche Börse Group’s Global Funding and Financing (GFF) Summit in Luxembourg.
The ‘Repo dynamics: Adapting to volatile markets’ panel brought together representatives from four financial institutions to discuss a number of topics, including quantitative tightening (QT) and mandatory clearing in Europe.
While some speakers believe that the clearing mandate will increase balance sheet capacity and support additional liquidity, others highlight the fragmented nature of the European market and the challenges in implementation.
In the US, the Fixed Income Clearing Corporation (FICC), a subsidiary of the Depository Trust and Clearing Corporation (DTCC), operates the Sponsored Repo clearing model, which allows non-bank institutions, such as hedge funds and pension funds, to access centrally-cleared repo transactions, reducing capital requirements.
The lack of a sophisticated money market fund industry in Europe, compared to the US, was cited as a potential obstacle to the smooth integration of new clearing participants.
One panellist noted that the current proposed timeline is unrealistic and that the industry calls for a one-year delay to ensure a more feasible implementation.
The situation in the UK is similar to Europe when it comes to central clearing, the panel heard, with much fragmentation being a major challenge.
The audience had the chance to participate in the discussion by voting in polls, which showed that 69.2 per cent of those present do not expect to see mandatory clearing in Europe by the end of 2026.
Another key focus of the panel was the mounting supply of government bonds.
One panellist expressed concerns about the market's capacity to absorb the US$9 trillion in US Treasury refinancing due this year, alongside the inflationary policies and tariffs, noting the potential for a steep rise in the rates curve.
Panellists discussed the potential impact of QT by central banks, expressing concerns about funding distress as central banks’ balance sheets shrink.
One speaker cautioned that the tightening of monetary policy could lead to funding distress and market dysfunction, drawing parallels to the events of September 2019 — when a sudden liquidity shortage caused repo rates to spike, leading to market instability.
Another participant noted that the leverage community, including hedge funds and banks, has a limited role in absorbing primary market supply because, unlike pension funds and other long-term investors, their strategies often focus on short-term trading and arbitrage.
Rather than purchasing bonds directly as new issuances, leveraged investors prefer trading existing bonds in the secondary market, enabling them to exploit price differences, interest rate movements, and market inefficiencies.
However, if demand for new bonds is weak, yields could rise sharply, affecting borrowing costs and market stability.
Regarding emerging markets, the panel highlighted the recent developments in China, with the new option for foreign investors to access Chinese sovereign bonds through Bond Connect.
Under the new offshore repo arrangement, Northbound Bond Connect participants can also use eligible onshore bonds as collateral to conduct renminbi repo business in Hong Kong.
The evolving role of repo desks was also a topic of discussion, with panellists noting the increasing sophistication of client-facing activities.
Repo desks are now engaging in a wider range of services, from providing leverage for futures and bond strategies to facilitating access to local currency and alternative asset classes.
Amid these changes, the panel emphasised the need for new cash providers in the repo market.
One speaker suggested that pension funds could lend their operational cash in the repo market, where banks and money market funds have been the main cash providers, to diversify the sources, increase liquidity, and prevent funding stress.
The ‘Repo dynamics: Adapting to volatile markets’ panel brought together representatives from four financial institutions to discuss a number of topics, including quantitative tightening (QT) and mandatory clearing in Europe.
While some speakers believe that the clearing mandate will increase balance sheet capacity and support additional liquidity, others highlight the fragmented nature of the European market and the challenges in implementation.
In the US, the Fixed Income Clearing Corporation (FICC), a subsidiary of the Depository Trust and Clearing Corporation (DTCC), operates the Sponsored Repo clearing model, which allows non-bank institutions, such as hedge funds and pension funds, to access centrally-cleared repo transactions, reducing capital requirements.
The lack of a sophisticated money market fund industry in Europe, compared to the US, was cited as a potential obstacle to the smooth integration of new clearing participants.
One panellist noted that the current proposed timeline is unrealistic and that the industry calls for a one-year delay to ensure a more feasible implementation.
The situation in the UK is similar to Europe when it comes to central clearing, the panel heard, with much fragmentation being a major challenge.
The audience had the chance to participate in the discussion by voting in polls, which showed that 69.2 per cent of those present do not expect to see mandatory clearing in Europe by the end of 2026.
Another key focus of the panel was the mounting supply of government bonds.
One panellist expressed concerns about the market's capacity to absorb the US$9 trillion in US Treasury refinancing due this year, alongside the inflationary policies and tariffs, noting the potential for a steep rise in the rates curve.
Panellists discussed the potential impact of QT by central banks, expressing concerns about funding distress as central banks’ balance sheets shrink.
One speaker cautioned that the tightening of monetary policy could lead to funding distress and market dysfunction, drawing parallels to the events of September 2019 — when a sudden liquidity shortage caused repo rates to spike, leading to market instability.
Another participant noted that the leverage community, including hedge funds and banks, has a limited role in absorbing primary market supply because, unlike pension funds and other long-term investors, their strategies often focus on short-term trading and arbitrage.
Rather than purchasing bonds directly as new issuances, leveraged investors prefer trading existing bonds in the secondary market, enabling them to exploit price differences, interest rate movements, and market inefficiencies.
However, if demand for new bonds is weak, yields could rise sharply, affecting borrowing costs and market stability.
Regarding emerging markets, the panel highlighted the recent developments in China, with the new option for foreign investors to access Chinese sovereign bonds through Bond Connect.
Under the new offshore repo arrangement, Northbound Bond Connect participants can also use eligible onshore bonds as collateral to conduct renminbi repo business in Hong Kong.
The evolving role of repo desks was also a topic of discussion, with panellists noting the increasing sophistication of client-facing activities.
Repo desks are now engaging in a wider range of services, from providing leverage for futures and bond strategies to facilitating access to local currency and alternative asset classes.
Amid these changes, the panel emphasised the need for new cash providers in the repo market.
One speaker suggested that pension funds could lend their operational cash in the repo market, where banks and money market funds have been the main cash providers, to diversify the sources, increase liquidity, and prevent funding stress.
NO FEE, NO RISK
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
