11 January 2018
Reporter: Jenna Lomax

Repo markets enhance OTC derivatives, says ICMA

“Well-functioning repo markets enhance the robustness of both the bilateral over-the-counter (OTC) derivatives market and the recently encouraged centralised clearing facilities”, according to International Capital Market Association (ICMA) chair, Godfried De Vidts.

De Vidts, who is also director of European Affairs at NEX, made the statement in ICMA’s first quarter report of 2018, adding that the “government and corporate bond markets need liquid secured financing markets, mainly repo or securities lending [as] the non-banking sector needs to be able to efficiently mobilise cash and collateral used by different types of investors, to broaden their liquidity and risk management and investment strategies”.

In terms of European repo and collateral market developments, ICMA gave details about the EU’s proposed rules on recovery and resolution of central counterparties (CCPs).

The report stated that “to determine [that] the tools to be provided for CCP recovery and resolution (R&R), consistent with our discussions on this topic, the European Repo and Collateral Council (ERCC) has focused on seeking to ensure that variation margin gains haircutting is clearly not to be applied to repo variation margins”.

For Basel III’s post-crisis regulatory reforms, ICMA said that in terms of the leverage ratio, it acknowledged the need to continue to monitor its impact on securities financing transactions (SFTs), markets and market liquidity.

It added that detailed provisions continue to be in line with Basel Committee on Banking Supervision’s January 2014 leverage ratio review.

The report also included new information on the reuse of securities collateral, and new requirements to report SFTs to a trade repository by T+1.

Alluding to Article 15 of the Securities Financing Transactions Regulation (SFTR), the report explained how Article 15 laid down new requirements for the reuse of securities provided as collateral under all security and title transfer collateral arrangements. It also warned market participants that they will need to prepare for SFTR, monitoring its ongoing developments, before its full implementation.

ICMA also alluded to the second Markets in Financial Instruments Directive (MiFID II) and Markets in Financial Instruments Regulation (MiFIR) investor protection.

It said the European Securities Market Authority confirmed that securities financing transactions SFTs are “inside the scope” of the MiFID II record keeping requirements, according to Article 16(6) of the regulation.

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