24 November 2016
Reporter: Drew Nicol

ECB to review securities lending and bond purchases

The European Central Bank (ECB) is preparing to review its securities lending and bond purchase programmes at its upcoming 8 December meeting.

“The ECB’s securities lending is proving valuable for smooth market functioning, and it is being reviewed on an ongoing basis,” explained an ECB spokesperson.

The central bank may choose to loosen its lending rules in order to open up a larger portion of the more than €1 trillion worth of government bonds it has collected so far in a bid to avoid a drought of eurozone high-quality liquid assets (HQLAs).

Bonds could be made more attractive by making collateral requirements more flexible, cutting lending fees or accepting more long-term lending terms.

Assets collected as part of the ECB’s public sector purchase programme were initially made available for securities lending in a decentralised manner by eurosystem central banks from April 2015. Corporate sector bonds were also added to its lending programme in July 2016.

The legitimacy of concern regarding a collateral shortage in the EU area has been a source of debate without 2016, with conflicting views mostly stemming from differences in what would constitute a ‘shortage’.

The results of the latest ICMA European Repo Market Survey, published in September, revealed that the share of HQLA as collateral jumped to 85.8 percent from 78.6 percent of the European fixed income collateral pool.

“The most likely cause [of the rise in government securities use] is the forthcoming implementation of reforms to money market mutual funds in the US in October, which is encouraging many prime funds to transform themselves into government securities funds in order to avoid more onerous operating conditions,” ICMA explained.

“Some European banks have been reliant on US funds for a significant share of their US dollar funding. But money market mutual fund regulation may not be the only factor. Demand for government securities is also buoyant because of the need for HQLAs to meet liquidity requirements.”

“This seems to have been driving a recovery in the share of German government bonds,” ICMA added.

However, concerns of a collateral shortage in the wake of the implementation of the European Market Infrastructure Regulations (EMIR) were dismissed as unfounded by the Steven Maijoor, chair of the European Securities Markets Authority (ESMA).

Speaking at the International Securities Lending Assocation's annual conference in June, Maijoor stated: "Within ESMA’s remit, EMIR contributed to a huge increase in the demand for collateral. Despite this, predictions of a major shortage of collateral in the system do not seem to have materialised, although ESMA continues to closely monitor market developments."

Moving on to discuss the European Central Bank’s recent quantitative easing policy, delegates at ISLA’s Annual Securities Finance and Collateral Management Conference in Vienna heard that “it is also very challenging to assess the net effects of bond purchases by central banks on collateral availability due to the multiple transmission channels”.

Maijoor added that, according to ESMA’s own research, the policy had led to a spike in the price of high-quality government bond collateral in the repo market, but that the premium was offset by the bank’s securities lending programme.

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