ICMA asks stakeholders how to make repo more green
22 April 2021 UK
Image: stock.adobe.com/Oleg Breslavtsev
The International Capital Market Association’s (ICMA) European Repo and Collateral Council (ERCC) has put out a consultation paper on how a future repo market can fit into green and sustainable finance.
The ERCC is asking stakeholders for feedback on the sustainability aspects of repo and collateral and to examine the potential risks — such as greenwashing — as well as the opportunities it could create for funding green projects and transitioning business towards more sustainable models.
But the devil is in the detail. The council asks whether a repo transaction with only some proportion of underlying green or sustainable collateral can be classified as a sustainable repo? Does all the underlying collateral have to be considered? And should the cash proceeds be directed towards financing green initiatives?
Nonetheless, the ERCC wants to get the ball rolling. The paper, ‘Green and sustainable finance: What is the role of the repo market?’, posits three potential intersections that it wants stakeholders to consider: repo with green and sustainable collateral; repo with green and sustainable cash proceeds; repo between green and sustainable counterparties.
The paper notes that its forecast by 2025, with new EU rules and investors increasingly focusing on sustainable economic activities, assets held in sustainable investment products in Europe will reach a value of €7.6 trillion, outstripping conventional funds.
Although sustainable finance plays a “key role” in mobilising the capital needed to overcome environmental challenges, such as transitioning the EU to become carbon neutral by 2050, the paper notes that, despite the rising number of green issuances, there is still a lot of potential for the role of repo in sustainable finance.
The paper highlights that one of the largest obstacles in green bond trading has historically been the lack of secondary market liquidity. The ERCC envisions a green repo market where buyers and sellers would only transfer bonds that are classified as green, such as the Green Bond GC Basket launched by Eurex in November 2020, which acts as a short-term funding vehicle for green assets.
While the repo market effectively and securely provides finance for green and sustainable bonds, triparty green bond baskets could further encourage holders to lend their green assets, boosting liquidity, the paper contends. Although there is currently a so-called ‘greenium’ on sustainable bonds due to the lack of market depth, developing greater liquidity will help foster price discovery by facilitating trading and arbitrage, the report says.
Stakeholders have been asked to comment on the paper via an online survey of six questions, open until 28 May, the results of which will help the ERCC identify areas it needs to focus on going forward and serve as “a starting point for a deeper discussion among members and other stakeholders”.
The ERCC is asking stakeholders for feedback on the sustainability aspects of repo and collateral and to examine the potential risks — such as greenwashing — as well as the opportunities it could create for funding green projects and transitioning business towards more sustainable models.
But the devil is in the detail. The council asks whether a repo transaction with only some proportion of underlying green or sustainable collateral can be classified as a sustainable repo? Does all the underlying collateral have to be considered? And should the cash proceeds be directed towards financing green initiatives?
Nonetheless, the ERCC wants to get the ball rolling. The paper, ‘Green and sustainable finance: What is the role of the repo market?’, posits three potential intersections that it wants stakeholders to consider: repo with green and sustainable collateral; repo with green and sustainable cash proceeds; repo between green and sustainable counterparties.
The paper notes that its forecast by 2025, with new EU rules and investors increasingly focusing on sustainable economic activities, assets held in sustainable investment products in Europe will reach a value of €7.6 trillion, outstripping conventional funds.
Although sustainable finance plays a “key role” in mobilising the capital needed to overcome environmental challenges, such as transitioning the EU to become carbon neutral by 2050, the paper notes that, despite the rising number of green issuances, there is still a lot of potential for the role of repo in sustainable finance.
The paper highlights that one of the largest obstacles in green bond trading has historically been the lack of secondary market liquidity. The ERCC envisions a green repo market where buyers and sellers would only transfer bonds that are classified as green, such as the Green Bond GC Basket launched by Eurex in November 2020, which acts as a short-term funding vehicle for green assets.
While the repo market effectively and securely provides finance for green and sustainable bonds, triparty green bond baskets could further encourage holders to lend their green assets, boosting liquidity, the paper contends. Although there is currently a so-called ‘greenium’ on sustainable bonds due to the lack of market depth, developing greater liquidity will help foster price discovery by facilitating trading and arbitrage, the report says.
Stakeholders have been asked to comment on the paper via an online survey of six questions, open until 28 May, the results of which will help the ERCC identify areas it needs to focus on going forward and serve as “a starting point for a deeper discussion among members and other stakeholders”.
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