EU repo clears first Q1 hurdle, barely
07 April 2017 London
Image: Shutterstock
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鈥檚 (ICMA) second quarterly report on market practice and regulation, it noted: 鈥淚n 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)鈥�.
That although general collateral and special rates were tighter than what is normally considered comfortable, it was 鈥渘othing as dramatic as seen over the 2016 year-end鈥�, ICMA added.
鈥淭his 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.鈥�
鈥淗owever, 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.鈥�
ICMA鈥檚 European Repo and Collateral Council warned in no uncertain terms at the start of 2017 that repo market stress 鈥渃ould heighten risks related to banks鈥� and firms鈥� ability to meet margin calls, which in turn could have systemic consequences鈥�.
The council described how a perfect storm of post-crisis regulation, the financial policy of central banks, along with other global market trends, are 鈥渧ery much acting in confluence to precipitate the perfect storm鈥�.
The month-end liquidity issues also caught the attention of the president of the German Federal Bank, who called for the European Central Bank鈥檚 (ECB) asset purchase programme to be reviewed.
Strong EU-wide economic growth means the ECB should finally begin unwinding its 鈥渧ery loose monetary policy鈥�, 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鈥檚 public sector purchase programme, which cut its monthly buying target from 鈧�80 billion to 鈧�60 billion worth of government bonds as of 1 April, as 鈥渁 pure emergency instrument, for example, to avert deflation鈥�.
鈥淥ne 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,鈥� stated Weidmann in a speech at the Rotary and Lions Club in L枚rrach, Germany.
鈥淭he 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.鈥�
In the International Capital Market Association鈥檚 (ICMA) second quarterly report on market practice and regulation, it noted: 鈥淚n 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)鈥�.
That although general collateral and special rates were tighter than what is normally considered comfortable, it was 鈥渘othing as dramatic as seen over the 2016 year-end鈥�, ICMA added.
鈥淭his 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.鈥�
鈥淗owever, 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.鈥�
ICMA鈥檚 European Repo and Collateral Council warned in no uncertain terms at the start of 2017 that repo market stress 鈥渃ould heighten risks related to banks鈥� and firms鈥� ability to meet margin calls, which in turn could have systemic consequences鈥�.
The council described how a perfect storm of post-crisis regulation, the financial policy of central banks, along with other global market trends, are 鈥渧ery much acting in confluence to precipitate the perfect storm鈥�.
The month-end liquidity issues also caught the attention of the president of the German Federal Bank, who called for the European Central Bank鈥檚 (ECB) asset purchase programme to be reviewed.
Strong EU-wide economic growth means the ECB should finally begin unwinding its 鈥渧ery loose monetary policy鈥�, 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鈥檚 public sector purchase programme, which cut its monthly buying target from 鈧�80 billion to 鈧�60 billion worth of government bonds as of 1 April, as 鈥渁 pure emergency instrument, for example, to avert deflation鈥�.
鈥淥ne 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,鈥� stated Weidmann in a speech at the Rotary and Lions Club in L枚rrach, Germany.
鈥淭he 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.鈥�
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