EU repo caught in âperfect stormâ
14 February 2017 London
Image: Shutterstock
The European repo market experienced extreme volatility and dislocation during a year-end liquidity crunch in 2016, according to the International Capital Market Association (ICMA).
ICMAâs European Repo and Collateral Council has warned that â[The repo market stress] could heighten risks related to banksâ and firmsâ ability to meet margin calls, which in turn could have systemic consequences.â
The council described how a perfect storm of post-crisis regulation, the financial policy of central banks, along with other global market trends, are âvery much acting in confluence to precipitate the perfect stormâ.
In a report into the EU repo market, ICMA offered a âpost mortemâ of the European repo marketâs year-end woes.
âMarket participants experienced extreme volatility and market dislocation as they tried to meet their needs for collateral in the form of high-quality liquid assets (HQLA) to meet regulatory requirements,â ICMA stated.
The survey, on which the report is based, calculated the amount of repo business outstanding on 7 December 2016, with responses from 65 offices of 62 financial groups.
The results showed the baseline figure for repo market size stood at âŹ5.66 trillion. ICMA clarified that this figure only reflects the percentage of data captured in the survey, which, although large, is not complete. Repo transactions by central banks were also not included.
Using a consistent sample of banks that have contributed to the last three surveys, the market shows 0.8 percent year-on-year growth and 2.4 percent growth from the June 2016 survey.
Regulatory-driven demand for HQLA led to a 4.7 percent increase in transactions including this collateral type since June, to now sit at 60.6 percent.
There was also a lengthening of maturities to meet the regulatory horizon of the liquidity coverage ratio.
European Repo and Collateral Council chair Godfried De Vidts said: âThe 2016 year-end was the first real test for the market since the Lehman default and sovereign bond crisis (when the market functioned relatively effectively).â
âIf the extreme volatility and dislocations witnessed at the end of December are an indication of future market resilience, we should be concerned. Market behaviour since the year-end, and forward pricing pressures for the March quarter-end, would seem to suggest that we may be entering a new normal for the repo market.â
He continued: âTurbulence in the repo market will ultimately be felt most by the pension funds, insurance companies and asset managers to whom citizens entrust their money. Since demand for HQLA, quantitative easing, and pressures on banksâ balance sheets are only set to increase, careful fine-tuning of some of the technical measures put in place by regulatory reforms, already being considered by the authorities, is fully justified.â
ICMAâs European Repo and Collateral Council has warned that â[The repo market stress] could heighten risks related to banksâ and firmsâ ability to meet margin calls, which in turn could have systemic consequences.â
The council described how a perfect storm of post-crisis regulation, the financial policy of central banks, along with other global market trends, are âvery much acting in confluence to precipitate the perfect stormâ.
In a report into the EU repo market, ICMA offered a âpost mortemâ of the European repo marketâs year-end woes.
âMarket participants experienced extreme volatility and market dislocation as they tried to meet their needs for collateral in the form of high-quality liquid assets (HQLA) to meet regulatory requirements,â ICMA stated.
The survey, on which the report is based, calculated the amount of repo business outstanding on 7 December 2016, with responses from 65 offices of 62 financial groups.
The results showed the baseline figure for repo market size stood at âŹ5.66 trillion. ICMA clarified that this figure only reflects the percentage of data captured in the survey, which, although large, is not complete. Repo transactions by central banks were also not included.
Using a consistent sample of banks that have contributed to the last three surveys, the market shows 0.8 percent year-on-year growth and 2.4 percent growth from the June 2016 survey.
Regulatory-driven demand for HQLA led to a 4.7 percent increase in transactions including this collateral type since June, to now sit at 60.6 percent.
There was also a lengthening of maturities to meet the regulatory horizon of the liquidity coverage ratio.
European Repo and Collateral Council chair Godfried De Vidts said: âThe 2016 year-end was the first real test for the market since the Lehman default and sovereign bond crisis (when the market functioned relatively effectively).â
âIf the extreme volatility and dislocations witnessed at the end of December are an indication of future market resilience, we should be concerned. Market behaviour since the year-end, and forward pricing pressures for the March quarter-end, would seem to suggest that we may be entering a new normal for the repo market.â
He continued: âTurbulence in the repo market will ultimately be felt most by the pension funds, insurance companies and asset managers to whom citizens entrust their money. Since demand for HQLA, quantitative easing, and pressures on banksâ balance sheets are only set to increase, careful fine-tuning of some of the technical measures put in place by regulatory reforms, already being considered by the authorities, is fully justified.â
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