13 April 2017
Basel
Reporter: Mark Dugdale

BIS committee recommends ‘targeted and temporary’ tweaks


Authorities should consider consider mitigating the adverse effects of a reduction in repo availability via more targeted and temporary measures, a Bank of International Settlements committee has recommended.

The global financial system committee, which was chaired by Sir Jon Cunliffe of the Bank of England, examined the functioning of repo markets in light of recent monetary policy, focusing only on repo transactions backed by government bonds. The resulting report was delivered on 12 April.

According to the committee, repo markets are “in a state of transition and differ across jurisdictions in terms of both their structure and their functioning”.

“Exceptionally accommodative monetary policy” has played a role in providing ample central bank liquidity to the market and reducing the need for banks to trade reserves through the repo market, the committee said

But at the same time, central bank asset purchases have increased the reserves seeking investment in the repo market, “putting pressure on the balance sheets of repo intermediaries” while reducing “the quantity of high-quality collateral in many jurisdictions”.

The committee conceded “it is too soon to establish strong links between the different drivers and the observed changes in markets, or to reach clear-cut conclusions on the need for policy measures”.

A further study undertaken within the next two years was recommended, to better judge the impact of regulations that act on the size or composition of banks’ balance sheets, the treatment of collateral, permissible netting and the effects of cross-jurisdictional differences in the way repo exposures are calculated for the purpose of regulation, taxes and fees.

“Prior to such a review, authorities in some jurisdictions might consider mitigating the adverse effects of a reduction in repo availability via more targeted and temporary measures,” the committee said the report. “These include measures to reduce the scarcity of certain collateral, as well as other policies implemented in certain jurisdictions which, though initiated with the objective of facilitating monetary policy, have nonetheless improved repo market functioning.”

The study comes as European repo traders were spared another dramatic liquidity drought during the March quarter-end.

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.”

More repo news
The latest news from Securities Lending Times
Join Our Newsletter

Sign up today and never
miss the latest news or an issue again

Subscribe now
Myanmar sees first ever repo transaction
26 July 2017 | Myanmar | Reporter: Jenna Lomax
KBZ Bank and YOMA Bank have carried out the first ever repo trade in Myanmar
Russia’s NSD gains repo contract parity
13 July 2017 | Moscow | Reporter: Drew Nicol
The standard form of the master agreement allows NSD clients to reduce the time required to develop contractual documents with counterparties
Deutsche Börse engages T7 for cash
04 July 2017 | Frankfurt | Reporter: Drew Nicol
Deutsche Börse shifts cash trading onto T7 and Eurex introduces new derivative hedging tools for the buy side
DTCC completes first trade on CCIT platform
30 June 2017 | New York | Reporter: Drew Nicol
The first trade comes a month after the US SEC approved rule changes allowing institutional investors to participate directly in the clearinghouse through CCIT membership
ICMA: NSFR makes EU repo less attractive
23 June 2017 | London | Reporter: Drew Nicol
The association also point to increased automation of highly manual and labour-intensive processes of the market as a way to mitigate rising costs and create efficiencies
UK Money Markets Code to rebuild trust
22 June 2017 | London | Reporter: Drew Nicol
Industry representatives drafted the code in partnership with the Bank of England (BoE) to replace the previous guidance, which has been judged to be outdated
Dealerweb claims significant US repo market share
20 June 2017 | New York | Reporter: Drew Nicol
The Dealerweb marketplace now captures 18 percent of US repo activity in inter-dealer trading