Year-end EU repo liquidity crunch largely avoided, ICMA finds
15 January 2021 UK
Image: Olivier Le Moal/adobe.stock.com
The International Capital Market Association (ICMA) European repo and Collateral Council (ERCC) has reported its findings on the repo market for 2020 year-end and reported that sterling rates saw the most volatility, particularly in specials.
US dollar repo markets were relatively muted over the year-end period, while from a euro perspective participants are more concerned about collateral scarcity than dealer capacity or excess liquidity, the council notes.
According to ERCC, concerns about potential year-end dislocations began to build as early as October 2020, following the largely unexpected drop in rates at the September quarter-end.
Market participants were wary of a potential collateral squeeze, citing significant excess reserves which had increased from €1.7 trillion at the end of 2019 to €3.2 trillion by the end of October 2020 and a reduced supply of collateral.
Also, euro sovereign issuance less central bank purchases had taken €300 billion of collateral out of the market during 2020.
The euro/dollar cross currency basis, which had been relatively flat since the extension of dollar central bank swap lines following the March-April turbulence had been readily moving lower.
This uncovered much much softer euro rates over year-end, a decrease of 5.5 per cent at the start of December. ERCC states that some participants had begun to fear a year-end similar to that of 2016.
A further consideration for the immediate future is the impact of Brexit on repo market liquidity, as well as for euro denominated derivatives, particularly in light of the migration of the euro equity markets from the UK to the Eurozone on 4 January 2021.
The end of the pension fund industry’s exemption for mandatory clearing could also increase demand for euro collateral transformation, an issue currently under discussion with the relevant authorities.
The ICMA ERCC states that they will continue to closely monitor the market developments, highlighting potential risks and dislocations to the smooth and orderly function of the market. In doing so, it will remain in close contact with the relevant authorities and regulatory bodies.
US dollar repo markets were relatively muted over the year-end period, while from a euro perspective participants are more concerned about collateral scarcity than dealer capacity or excess liquidity, the council notes.
According to ERCC, concerns about potential year-end dislocations began to build as early as October 2020, following the largely unexpected drop in rates at the September quarter-end.
Market participants were wary of a potential collateral squeeze, citing significant excess reserves which had increased from €1.7 trillion at the end of 2019 to €3.2 trillion by the end of October 2020 and a reduced supply of collateral.
Also, euro sovereign issuance less central bank purchases had taken €300 billion of collateral out of the market during 2020.
The euro/dollar cross currency basis, which had been relatively flat since the extension of dollar central bank swap lines following the March-April turbulence had been readily moving lower.
This uncovered much much softer euro rates over year-end, a decrease of 5.5 per cent at the start of December. ERCC states that some participants had begun to fear a year-end similar to that of 2016.
A further consideration for the immediate future is the impact of Brexit on repo market liquidity, as well as for euro denominated derivatives, particularly in light of the migration of the euro equity markets from the UK to the Eurozone on 4 January 2021.
The end of the pension fund industry’s exemption for mandatory clearing could also increase demand for euro collateral transformation, an issue currently under discussion with the relevant authorities.
The ICMA ERCC states that they will continue to closely monitor the market developments, highlighting potential risks and dislocations to the smooth and orderly function of the market. In doing so, it will remain in close contact with the relevant authorities and regulatory bodies.
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