07 April 2017
London
Reporter: Drew Nicol

EU repo clears first Q1 hurdle, barely


EU repo traders were spared another dramatic liquidity drought during the March quarter-end, but concerns remain for the long-term health of the market.

In the International Capital Market Association’s (ICMA) second quarterly report on market practice and regulation, it noted: “In the weeks leading up to quarter-end, the market had shown a high degree of uncertainty and nervousness, with repo rates being priced very wide (and with general collateral trading below -3 percent)”.

That although general collateral and special rates were tighter than what is normally considered comfortable, it was “nothing as dramatic as seen over the 2016 year-end”, ICMA added.

“This should not be surprising, given the extreme levels seen at the end of December, and the relatively asymmetrical risks related to anticipating demand and supply imbalances over statement dates.”

“However, balance sheet pressures look to be much less constrained, while the EUR-USD basis has also normalised, which is reflected in quarter-end rates settling at slightly easier levels than originally anticipated.”

ICMA’s European Repo and Collateral Council warned in no uncertain terms at the start of 2017 that repo market stress “could heighten risks related to banks’ and firms’ ability to meet margin calls, which in turn could have systemic consequences”.

The council described how a perfect storm of post-crisis regulation, the financial policy of central banks, along with other global market trends, are “very much acting in confluence to precipitate the perfect storm”.

The month-end liquidity issues also caught the attention of the president of the German Federal Bank, who called for the European Central Bank’s (ECB) asset purchase programme to be reviewed.

Strong EU-wide economic growth means the ECB should finally begin unwinding its “very loose monetary policy”, according to German Central Bank president Jens Weidmann.

Weidmann who is also chairman of the board of the Bank for International Settlements, described the ECB’s public sector purchase programme, which cut its monthly buying target from €80 billion to €60 billion worth of government bonds as of 1 April, as “a pure emergency instrument, for example, to avert deflation”.

“One thing seems to me to be quite clear in view of the current prognosis: we are now a long way from a deflation, ie, an expectation-driven downward spiral in which wages and prices are mutually profound. I have always regarded this fear as exaggerated in the past,” stated Weidmann in a speech at the Rotary and Lions Club in Lörrach, Germany.

“The extensive purchase of government bonds blurs the dividing line between monetary policy and fiscal policy. Central banks in the euro area have now become the largest creditors of the member states. I consider this to be problematic in several respects.”

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