ICMA ERCC: 2018 saw noticeable spike in settlement fails
16 January 2019 London
Image: Shutterstock
The end of last year saw a spike in settlement fails for securities settling on European central security depositories, according to the International Capital Market Association’s (ICMA) European Repo and Collateral Council (ERCC).
However, the ERCC said: “It is difficult to discern the extent to which this [spike in settlement fails] is caused by genuine unavailability of collateral and how much is the result of a very low-interest-rate environment.”
Compared with the previous two year-ends, 2018 was relatively uneventful, the ERCC added.
It stated: “Core Euro general collateral (GC) and specials did come at a premium leading up to the turn but then cheapened significantly into year-end itself. Meanwhile, non-core general collateral saw scarcely an impact, with only some specials becoming difficult to find.”
Elsewhere, the council found that the US Treasury repo market “was the real surprise, with an unexpected scramble for cash sending rates notably higher”.
It added: “While the markets, for the most part, were fairly orderly, it is clear that a number of year-end pressures and risks persist.”
ERCC found banks still face pressures to reduce balance sheets, while positioning is also an “exacerbating factor”, both in terms of collateral and foreign exchange which is highlighted by the spike in US dollar rates.
Reflecting on the last couple of years, the ERCC affirmed: “Since 2016 it would seem as if the market has become more aware of these risks and better prepared in terms of managing its year-end financing and collateral requirements.”
“Locking-in funding early, however, comes at a premium. But, while the extreme levels and dislocations of the 2016 turn have not been repeated since, there is still plenty of quantitative and qualitative evidence to suggest that year-end pressures persist and that access to repo and lending markets for many firms is impaired.”
The ERCC concluded: “As the US repo rate spike reminds us, the problems flagged by the 2016 turn have not necessarily gone away, they just manifest themselves in not entirely predictable ways.”
However, the ERCC said: “It is difficult to discern the extent to which this [spike in settlement fails] is caused by genuine unavailability of collateral and how much is the result of a very low-interest-rate environment.”
Compared with the previous two year-ends, 2018 was relatively uneventful, the ERCC added.
It stated: “Core Euro general collateral (GC) and specials did come at a premium leading up to the turn but then cheapened significantly into year-end itself. Meanwhile, non-core general collateral saw scarcely an impact, with only some specials becoming difficult to find.”
Elsewhere, the council found that the US Treasury repo market “was the real surprise, with an unexpected scramble for cash sending rates notably higher”.
It added: “While the markets, for the most part, were fairly orderly, it is clear that a number of year-end pressures and risks persist.”
ERCC found banks still face pressures to reduce balance sheets, while positioning is also an “exacerbating factor”, both in terms of collateral and foreign exchange which is highlighted by the spike in US dollar rates.
Reflecting on the last couple of years, the ERCC affirmed: “Since 2016 it would seem as if the market has become more aware of these risks and better prepared in terms of managing its year-end financing and collateral requirements.”
“Locking-in funding early, however, comes at a premium. But, while the extreme levels and dislocations of the 2016 turn have not been repeated since, there is still plenty of quantitative and qualitative evidence to suggest that year-end pressures persist and that access to repo and lending markets for many firms is impaired.”
The ERCC concluded: “As the US repo rate spike reminds us, the problems flagged by the 2016 turn have not necessarily gone away, they just manifest themselves in not entirely predictable ways.”
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