Preserving calm at year end
07 Febuary 2023
Published each January, the ICMA European Repo and Collateral Committee year-end report examines how end-of-year conditions have impacted leading repo markets. Bob Currie analyses its latest release
Image: stock.adobe.com/inigocia
The ICMA European Repo and Collateral Committee (ERCC) has released its annual summary of repo market performance around the year end.
Traditionally published by the ERCC in January, the report reflects on how end-of-year conditions have impacted EUR, GBP, USD and JPY repo markets, drawing on market data and accounts supplied by buy-side and sell-side market participants.
Written by International Capital Markets Association (ICMA) senior director and deputy head of market practice and regulatory policy Andy Hill, the latest version of this report indicates that participants in euro repo markets had started preparing early for the 2022 year-end and with some degree of nervousness, with the turn becoming a focus of attention as early as August.
This accords with SFT’s own research in the market, which indicates that some market participants had begun preparations for the turn as early as July or August (see, for example, SFT Issue 319, pp 18-35).
Hill finds that by late September and early October, term trades over year-end were implying turn rates of 1000bps below the euro short-term rate (€STR) for German collateral, with the FX basis indicating a notional euro rate of -14 per cent.
Pricing improved in the run-up to the year-end, such that by 28 December German collateral (GC and some specific repo) averaged €STR-350bps, French collateral averaged €STR-290bps and Italian collateral averaged €STR-195bps.
The report indicates that Spanish collateral, which had become more difficult to source into December, averaged around €STR-300bps over the turn.
Several factors are likely to have been important in containing price disruption over the 2022-23 turn. In general terms, financial authorities began to take steps to address concerns around collateral scarcity and to reduce excess liquidity in the banking system. In late October, the German Finance Ministry, Deutsche Finanzgenturn, announced that it would make €54 billion in German bonds across 18 German ISINs available through repo channels — an action that SFT has addressed in some detail in other articles (see SFT, 315, pp 14-17 or SFT 319, pp 18-35).
Also, the European Central Bank raised its borrowing facility against cash on the Public Sector Purchases Programme (PSPP) and Pandemic Emergency Purchase Programme (PEPP) from €150 billion to €250 billion.
The ECB confirmed at its December 2022 meeting that it will provide further details in Q1 of its plans to reduce its Asset Purchase Programme (APP) holdings. It had previously indicated in its autumn statements that it intended to recalibrate the terms of its Targeted Longer-term Refinancing Operations (TLTRO), with banks repaying €296 billion in TLTRO loans in November and €447 billion a month later, with a further €52 billion in TLTRO holdings also maturing in December.
With these interventions, the 2022 year-end was negotiated with less disruption than some had feared in advance. “The DFA intervention in particular had an important impact,” says Hill. “It was particularly after these interventions that the implied forward rate began to stabilise.”
The ERCC report finds that, as often happens, trading volumes declined significantly going into year-end, although the tail-off in activity seems to have come earlier than in previous years, with a notable drop going into the final week of the year. This can be seen in RFR volumes as well as in Eurex outstanding balances. “This probably also reflects the degree of nervousness and early attention going into the year-end, with market participants squaring their books well in advance of the turn,” says the report (p 13).
On balance, Hill indicates that some widening in repo market pricing was certainly significant, particularly when measured against pricing levels in some other markets. “It is also important to remember these pricing levels relate to the interbank, primarily centrally cleared, market,” he says. “Pricing for end investors in many cases will have been even more extreme.”
For GBP repo markets, volatility was “relatively benign” over the turn and collateral availability appeared to improve, despite preceding concerns that sterling repo rates could move lower owing to significant amounts of cash being invested at the short end of the yield curve.
The report identifies a number of factors that were potentially important in offsetting any reserve-collateral disequilibrium, including stronger term reverse repo activity and quantitative tightening. The GBP-USD FX basis moved into positive territory, creating opportunities for US banks to lend USD and receive GBP, thereby removing some sterling liquidity from the system.
With the Bank of England’s November Monetary Policy Committee (MPC) meeting, repo market participants took advantage of the steepening yield curve to extend the term of reverse repo activity moving into January.
“Accordingly, the gilt repo market sailed through year-end with little friction, particularly for placers of cash,” notes the report (p 15).
For US repo markets, the ERCC concludes that record level of uptake in the Federal Reserve overnight reserve repo (RRP) was important in ensuring a “smooth and uneventful year end”, with the RRP becoming an effective mechanism for soaking up excess liquidity.
The ICMA reports that the well-developed ecosystem for supporting sponsored repo clearing — through the DTCC’s Fixed Income Clearing Corporation (FICC) facility — has also served as a stabiliser for the market, enabling banks to meet the requirements of money-market funds without consuming large amounts of balance sheet.
“Accordingly, turn repo rates are barely discernible from those on any other neighbouring days, while the RRP uptake on 30 December was a record US$2.55 trillion,” it says (p 16).
Sponsored clearing will continue to gain traction in other jurisdictions and is likely to play a significant role in managing concerns around dealer intermediation capacity in the run up to year end. Alongside multilateral netting and balance sheet efficiency, this also offers benefits in terms of operational efficiency and contract preparation — enabling financing relationships to be managed via a CCP without the burden of preparing multiple Global Master Repurchase Agreements (GMRAs) and running due diligence on bilateral counterparties. While central clearing is not a panacea for all repo market challenges, it is a tool offering standardisation, anonymity and risk management benefits for market participants, albeit with an associated cost.
For JPY repo, the report finds that term repo rates tightened over the year end, particularly for special repo, but the overnight rate remained relatively stable. Although the change in the Bank of Japan’s monetary policy appeared to catch the market off guard to some extent, this did not result in significant price dislocation in JPY repo markets.
The ICMA ERCC briefing note on the European repo market at year end has been published each January since 2017. It draws heavily on data supplied by Eurex, Bloomberg and CME Group Benchmark Administration.
Commentary and insights from AXA IM, Bank of America Merrill Lynch, Barclays, BlackRock, Eurex, HVB Unicredit, J.P. Morgan, LCH and UBS were key in preparing the report.
Traditionally published by the ERCC in January, the report reflects on how end-of-year conditions have impacted EUR, GBP, USD and JPY repo markets, drawing on market data and accounts supplied by buy-side and sell-side market participants.
Written by International Capital Markets Association (ICMA) senior director and deputy head of market practice and regulatory policy Andy Hill, the latest version of this report indicates that participants in euro repo markets had started preparing early for the 2022 year-end and with some degree of nervousness, with the turn becoming a focus of attention as early as August.
This accords with SFT’s own research in the market, which indicates that some market participants had begun preparations for the turn as early as July or August (see, for example, SFT Issue 319, pp 18-35).
Hill finds that by late September and early October, term trades over year-end were implying turn rates of 1000bps below the euro short-term rate (€STR) for German collateral, with the FX basis indicating a notional euro rate of -14 per cent.
Pricing improved in the run-up to the year-end, such that by 28 December German collateral (GC and some specific repo) averaged €STR-350bps, French collateral averaged €STR-290bps and Italian collateral averaged €STR-195bps.
The report indicates that Spanish collateral, which had become more difficult to source into December, averaged around €STR-300bps over the turn.
Several factors are likely to have been important in containing price disruption over the 2022-23 turn. In general terms, financial authorities began to take steps to address concerns around collateral scarcity and to reduce excess liquidity in the banking system. In late October, the German Finance Ministry, Deutsche Finanzgenturn, announced that it would make €54 billion in German bonds across 18 German ISINs available through repo channels — an action that SFT has addressed in some detail in other articles (see SFT, 315, pp 14-17 or SFT 319, pp 18-35).
Also, the European Central Bank raised its borrowing facility against cash on the Public Sector Purchases Programme (PSPP) and Pandemic Emergency Purchase Programme (PEPP) from €150 billion to €250 billion.
The ECB confirmed at its December 2022 meeting that it will provide further details in Q1 of its plans to reduce its Asset Purchase Programme (APP) holdings. It had previously indicated in its autumn statements that it intended to recalibrate the terms of its Targeted Longer-term Refinancing Operations (TLTRO), with banks repaying €296 billion in TLTRO loans in November and €447 billion a month later, with a further €52 billion in TLTRO holdings also maturing in December.
With these interventions, the 2022 year-end was negotiated with less disruption than some had feared in advance. “The DFA intervention in particular had an important impact,” says Hill. “It was particularly after these interventions that the implied forward rate began to stabilise.”
The ERCC report finds that, as often happens, trading volumes declined significantly going into year-end, although the tail-off in activity seems to have come earlier than in previous years, with a notable drop going into the final week of the year. This can be seen in RFR volumes as well as in Eurex outstanding balances. “This probably also reflects the degree of nervousness and early attention going into the year-end, with market participants squaring their books well in advance of the turn,” says the report (p 13).
On balance, Hill indicates that some widening in repo market pricing was certainly significant, particularly when measured against pricing levels in some other markets. “It is also important to remember these pricing levels relate to the interbank, primarily centrally cleared, market,” he says. “Pricing for end investors in many cases will have been even more extreme.”
For GBP repo markets, volatility was “relatively benign” over the turn and collateral availability appeared to improve, despite preceding concerns that sterling repo rates could move lower owing to significant amounts of cash being invested at the short end of the yield curve.
The report identifies a number of factors that were potentially important in offsetting any reserve-collateral disequilibrium, including stronger term reverse repo activity and quantitative tightening. The GBP-USD FX basis moved into positive territory, creating opportunities for US banks to lend USD and receive GBP, thereby removing some sterling liquidity from the system.
With the Bank of England’s November Monetary Policy Committee (MPC) meeting, repo market participants took advantage of the steepening yield curve to extend the term of reverse repo activity moving into January.
“Accordingly, the gilt repo market sailed through year-end with little friction, particularly for placers of cash,” notes the report (p 15).
For US repo markets, the ERCC concludes that record level of uptake in the Federal Reserve overnight reserve repo (RRP) was important in ensuring a “smooth and uneventful year end”, with the RRP becoming an effective mechanism for soaking up excess liquidity.
The ICMA reports that the well-developed ecosystem for supporting sponsored repo clearing — through the DTCC’s Fixed Income Clearing Corporation (FICC) facility — has also served as a stabiliser for the market, enabling banks to meet the requirements of money-market funds without consuming large amounts of balance sheet.
“Accordingly, turn repo rates are barely discernible from those on any other neighbouring days, while the RRP uptake on 30 December was a record US$2.55 trillion,” it says (p 16).
Sponsored clearing will continue to gain traction in other jurisdictions and is likely to play a significant role in managing concerns around dealer intermediation capacity in the run up to year end. Alongside multilateral netting and balance sheet efficiency, this also offers benefits in terms of operational efficiency and contract preparation — enabling financing relationships to be managed via a CCP without the burden of preparing multiple Global Master Repurchase Agreements (GMRAs) and running due diligence on bilateral counterparties. While central clearing is not a panacea for all repo market challenges, it is a tool offering standardisation, anonymity and risk management benefits for market participants, albeit with an associated cost.
For JPY repo, the report finds that term repo rates tightened over the year end, particularly for special repo, but the overnight rate remained relatively stable. Although the change in the Bank of Japan’s monetary policy appeared to catch the market off guard to some extent, this did not result in significant price dislocation in JPY repo markets.
The ICMA ERCC briefing note on the European repo market at year end has been published each January since 2017. It draws heavily on data supplied by Eurex, Bloomberg and CME Group Benchmark Administration.
Commentary and insights from AXA IM, Bank of America Merrill Lynch, Barclays, BlackRock, Eurex, HVB Unicredit, J.P. Morgan, LCH and UBS were key in preparing the report.
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
