In its first quarterly report of 2017, ICMA noted that ECB’s public sector purchase programme (PSPP), which directly relates to the European repo market, is approximately 80 percent based on government bond collateral.
“Holding securities within the PSPP naturally removes them from the market and it is only through the arrangements for securities lending that these holdings can then be made available to assist the market in meeting its operational needs. In consequence, collateral availability could decline, at a time when collateral demands are increasing,” ICMA stated.
“In particular, new derivative margining requirements are starting to be imposed, and this comes at a time when there is already evidence that pressure on the collateral market has been increasing.”
Specifically, ICMA highlighted that collateral decomposition by issuers and type suggests a notable increase in the share of German and Italian government bonds.
In response to the ECB’s December announcement of its decision to extend its APP until December 2017, ICMA acknowledged the positive amendment to introduce cash collateral for PSPP securities lending facilities.
ICMA added that this alone will not solve current concerns and there remains scope to further enhance the effectiveness of the securities lending arrangements.
The association also reaffirmed its commitment to being an active player in the arena in the coming year.