ICMA: Don鈥檛 be fooled by the data, year-end risks lurk ahead
13 November 2019 London
Image: Shutterstock
The International Capital Market Association (ICMA) has urged the European Commission and repo market participants not to be lulled into a false sense of security by its seemingly positive market report about the very real liquidity challenges due at year-end.
The chair of ICMA鈥檚 European Repo & Collateral Council (ERCC) delivered the stark warning alongside the association鈥檚 latest report on the European repo market, which showed a 5.6 percent year-on-year market growth from June 2018.
The ERCC data revealed that the EU repo market鈥檚 size now sits at 鈧�7,761 billion, up from 鈧�7,351 billion in June last year but down 1.1 percent from December 2018.
The data comes as part of ICMA鈥檚 37th semi-annual survey of the European repo market, which asked financial institutions operating in a number of European financial centres for the value of the cash side of repo and reverse repo contracts still outstanding at close-of-business on 5 June 2019.
Today鈥檚 report includes survey responses by 55 offices of 51 financial groups, mainly banks.
However, commenting on the results, Godfried De Vidts, senior advisor to ICMA鈥檚 ERCC, said: 鈥淲hile the headline numbers paint a picture of a robust market, what they do not reveal is the underlying vulnerability that we see around certain events such as year-end.鈥�
鈥淭his was the message delivered to the recent European Commission expert group on pension scheme arrangements,鈥� he added.
In a public briefing published in June, ICMA argued that while the markets have so far proved resilient, they are still some way from reaching a new normality, with regional markets at different stages of that evolution reflecting the divergent implementation of regulatory reforms on different timelines.
The association went on to note that this market environment often requires central banks to step in and provide much-needed capacity, particularly at key reporting dates, such as year-ends when multiple regulatory and other measures such as bank levies encourage banks to reduce balance sheet capacity allocated to low-risk/low return activity.
ICMA concluded that this is of 鈥減articular concern given the need for the private sector to absorb the unwind of quantitative easing programmes over the coming years鈥�.
The ERCC has been paying particular attention to the EU repo market鈥檚 year-end liquidity issues since the severe turbulence felt in 2016.
In a report on the 2018 year-end, published in January, ICMA described how 2016 saw 鈥渦nprecedented market stress and pricing dislocations, particularly in higher grade euro-denominated repo鈥�.
Research by ICMA after the 2016 event has highlighted that a combination of factors, including market positioning, foreign exchange basis, access to central bank lending facilities, as well as regulatory reporting requirements (Basel ratios and national banking levies) all contributed to the 鈥減erfect storm鈥� event.
After 2016, questions were raised around the impacts of regulation and monetary policy on market functioning and the degree to which these were possibly exacerbating volatility.
ICMA has noted that market participants have been at pains to learn the lessons of 2016 and are yet to suffer anything as serious in subsequent year-ends.
However, the increasing regulatory-driven pressure on liquidity and an overreliance on central bank intervention during EU reporting dates means that the market is yet to find a long-term solution to future liquidity squeezes.
The chair of ICMA鈥檚 European Repo & Collateral Council (ERCC) delivered the stark warning alongside the association鈥檚 latest report on the European repo market, which showed a 5.6 percent year-on-year market growth from June 2018.
The ERCC data revealed that the EU repo market鈥檚 size now sits at 鈧�7,761 billion, up from 鈧�7,351 billion in June last year but down 1.1 percent from December 2018.
The data comes as part of ICMA鈥檚 37th semi-annual survey of the European repo market, which asked financial institutions operating in a number of European financial centres for the value of the cash side of repo and reverse repo contracts still outstanding at close-of-business on 5 June 2019.
Today鈥檚 report includes survey responses by 55 offices of 51 financial groups, mainly banks.
However, commenting on the results, Godfried De Vidts, senior advisor to ICMA鈥檚 ERCC, said: 鈥淲hile the headline numbers paint a picture of a robust market, what they do not reveal is the underlying vulnerability that we see around certain events such as year-end.鈥�
鈥淭his was the message delivered to the recent European Commission expert group on pension scheme arrangements,鈥� he added.
In a public briefing published in June, ICMA argued that while the markets have so far proved resilient, they are still some way from reaching a new normality, with regional markets at different stages of that evolution reflecting the divergent implementation of regulatory reforms on different timelines.
The association went on to note that this market environment often requires central banks to step in and provide much-needed capacity, particularly at key reporting dates, such as year-ends when multiple regulatory and other measures such as bank levies encourage banks to reduce balance sheet capacity allocated to low-risk/low return activity.
ICMA concluded that this is of 鈥減articular concern given the need for the private sector to absorb the unwind of quantitative easing programmes over the coming years鈥�.
The ERCC has been paying particular attention to the EU repo market鈥檚 year-end liquidity issues since the severe turbulence felt in 2016.
In a report on the 2018 year-end, published in January, ICMA described how 2016 saw 鈥渦nprecedented market stress and pricing dislocations, particularly in higher grade euro-denominated repo鈥�.
Research by ICMA after the 2016 event has highlighted that a combination of factors, including market positioning, foreign exchange basis, access to central bank lending facilities, as well as regulatory reporting requirements (Basel ratios and national banking levies) all contributed to the 鈥減erfect storm鈥� event.
After 2016, questions were raised around the impacts of regulation and monetary policy on market functioning and the degree to which these were possibly exacerbating volatility.
ICMA has noted that market participants have been at pains to learn the lessons of 2016 and are yet to suffer anything as serious in subsequent year-ends.
However, the increasing regulatory-driven pressure on liquidity and an overreliance on central bank intervention during EU reporting dates means that the market is yet to find a long-term solution to future liquidity squeezes.
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