Index Investing News
Saturday, May 24, 2025
No Result
View All Result
  • Login
  • Home
  • World
  • Investing
  • Financial
  • Economy
  • Markets
  • Stocks
  • Crypto
  • Property
  • Sport
  • Entertainment
  • Opinion
  • Home
  • World
  • Investing
  • Financial
  • Economy
  • Markets
  • Stocks
  • Crypto
  • Property
  • Sport
  • Entertainment
  • Opinion
No Result
View All Result
Index Investing News
No Result
View All Result

ICMA warns of eurozone repo “dysfunction”

by Index Investing News
October 26, 2022
in Economy
Reading Time: 4 mins read
A A
0
Home Economy
Share on FacebookShare on Twitter


UK omnishambles; the BoJ’s “broken” monetary policy; a creaking Treasury market; China’s economic woes; EM debt crises. It was about time that we had an ominous European headline to collect the full set.

The International Capital Markets Association has today sent this open letter to the European Central Bank to express finance industry fears over “rising dysfunction” in the eurozone repo and money markets.

. . . The conditions can largely be attributed to a disequilibrium situation of excess liquidity in the Euro banking system and a scarcity of high-quality, liquid collateral. The resulting risks are accentuated by constraints on bank intermediation.

While the environment of excess reserves and collateral scarcity has been the norm for a number of years, it has led to major market dislocations only on a limited number of occasions, notably certain year-end reporting periods and the COVID-induced turmoil of March-April 2020. However, as we enter a new phase of the monetary policy cycle, with the normalization of interest rates and associated market volatility, the potential for both the scale and frequency of such dislocations is likely to increase.

The market focus and associated pricing for 2022 year-end is already indicating such concerns, as is the persistent widening of asset swap spreads of short-dated high-quality euro securities. For example, we have observed the 3-month Bubill-EURIBOR spread invert to around 60bp (reaching 100bp in early September), while the swap spread for the on-the-run Shatz has become ever more deeply inverted to around 110bp (having reached 120bp last month). Meanwhile, German General Collateral over year-end is implying a rate for the “turn” of between -10% and 12%, while the USDEUR FX Basis Swap is also implying a rate of around -14%. The recent September 2022 quarter-end, which saw the widest quarter-end dislocation between collateralized and uncollateralized rates since the introduction of the euro, has only added to these concerns.

These pressures on short-term markets and collateral scarcity could be further accentuated by less favourable rates for the Targeted Long-Term Refinancing Operations or the introduction of reverse tiering to the ECB deposit facility. This extreme sensitivity to any changes in the liquidity-collateral equilibrium was highlighted at the start of the September 14 maintenance period when despite the ECB deposit rate being 75bp higher, repo rates actually tightened, with euro General Collateral trading around -0.30%.

Basically, if we’ve got this right, the ECB’s QE programme created reserves to buy eurozone bonds, but banks are now swimming in reserves while the European financial system is struggling with a shortage of high-grade eurozone bonds to use as collateral.

This is now gumming up financial plumbing in a worrying way — actually impeding the ECB’s attempts at tightening monetary policy in a firm but careful way — and the year-end could become a crunch point.

ICMA wants the ECB to consider two measures introduced by the Federal Reserve and the Swiss National Bank as a way to ameliorate the “disequilibrium of excess liquidity and collateral scarcity”. These are:

1) The Fed’s Overnight Reserve Repurchase Facility, through which the New York Fed repos some of its Treasury holdings (selling them and agreeing to repurchase soon afterwards) to provide the system with extra collateral, soak up excess reserves and set a floor under short-term interest rates.

2) The SNB’s recent announcement that it would issue tradable Treasury bills. Of course, starting a eurozone bill issuance programme could be politically touchy, but ICMA reckons it would be less complex than a reverse repo programme and would also not further clog up bank balance sheets in the same way.

Since ICMA is a finance industry lobbying body, the letter also includes some more general lobbying on behalf of banks to loosen their regulatory straitjacket — even though this is beyond the purview of the ECB.

A further, and possibly complementary, consideration relates to the capacity for banks to intermediate in the euro repo and money markets (and potentially the bond and derivatives markets more broadly). While the euro repo and money markets function relatively well on the whole, there are clearly identifiable pressure points around bank reporting dates (primarily quarter-ends and year-ends), as well as during times of heightened volatility, both of which have direct impacts on bank balance sheets and available risk capital to support market intermediation. A targeted recalibration of the Leverage Ratio (such as for certain transactions counterparty types) or the ability to re-allocate capital buffers to supporting liquidity provision, particularly at such times, could contribute to both market stability and resilience. While such refinements to the regulatory capital framework are beyond the gift of the ECB, it may be something where its support and guidance could be helpful.

FTAV has to admit that we hadn’t cottoned on to some of the issues raised by the letter, but we’re unsurprised that is causing problems.

It’s actually been surprising how little breakage there has been from the abrupt shift in monetary policy, and the year-end is a traditional time for mulled wine, family and financial plumbing issues.

But what do our readers think? Is this just industry moaning, or a new thing we should start to freak out about?



Source link

Tags: DysfunctionEurozoneICMArepoWarns
ShareTweetShareShare
Previous Post

White House Says Reports of National Security Reviews on Elon Musk Are ‘Not True’ — Tesla CEO Prepares to Close Twitter Deal Friday – Featured Bitcoin News

Next Post

U.S. SEC to vote on executive compensation clawback rule By Reuters

Related Posts

The Fed’s not making a revenue

The Fed’s not making a revenue

by Index Investing News
May 24, 2025
0

Unlock the Editor’s Digest free of chargeRoula Khalaf, Editor of the FT, selects her favorite tales on this weekly publication.The...

Greenback notches greatest weekly drop since tariffs sell-off over US debt fears

Greenback notches greatest weekly drop since tariffs sell-off over US debt fears

by Index Investing News
May 24, 2025
0

Unlock the Editor’s Digest totally freeRoula Khalaf, Editor of the FT, selects her favorite tales on this weekly e-newsletter.Investor jitters...

Joe Weisenthal on jobs and migration

Joe Weisenthal on jobs and migration

by Index Investing News
May 23, 2025
0

I noticed an attention-grabbing tweet by Joe Weisenthal, discussing the query of what determines interstate migration: That is the traditional...

What EU exports are hit hardest by Trump’s 50% tariff risk?

What EU exports are hit hardest by Trump’s 50% tariff risk?

by Index Investing News
May 23, 2025
0

Donald Trump’s risk to impose a 50 per cent tariff on all exports from the EU would ship a hammer...

MiB: Ron Shaich, Au Bon Ache, Panera Bread & CAVA

MiB: Ron Shaich, Au Bon Ache, Panera Bread & CAVA

by Index Investing News
May 23, 2025
0

    This week, I communicate with Ron Shaich, co-founder of Au Bon Ache and founder and former chairman and...

Next Post
U.S. SEC to vote on executive compensation clawback rule By Reuters

U.S. SEC to vote on executive compensation clawback rule By Reuters

War, Greed and Mass Manipulation — Global Issues

War, Greed and Mass Manipulation — Global Issues

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

RECOMMENDED

Crypto Exchange Bybit To Slash 30% Of Its Headcount

Crypto Exchange Bybit To Slash 30% Of Its Headcount

December 5, 2022
Wimbledon: Novak Djokovic and Carlos Alcaraz chase historical past in Sunday’s remaining | Tennis Information

Wimbledon: Novak Djokovic and Carlos Alcaraz chase historical past in Sunday’s remaining | Tennis Information

July 13, 2024
Wisdom From My Wife – Econlib

Wisdom From My Wife – Econlib

February 20, 2024
Ryan Moore retains it easy as Order Of Australia repeats Minstrel win | Racing Information

Ryan Moore retains it easy as Order Of Australia repeats Minstrel win | Racing Information

July 17, 2022
Burien sketches growth vision for busy, diverse Ambaum Boulevard

Burien sketches growth vision for busy, diverse Ambaum Boulevard

June 11, 2023
4 speaking factors as Nerazzurri e book place in remaining after hectic second leg

4 speaking factors as Nerazzurri e book place in remaining after hectic second leg

May 6, 2025
Bank crisis could cast pall over commercial real estate market

Bank crisis could cast pall over commercial real estate market

March 25, 2023
2 Russian villages evacuated after fireplace at munitions depot

2 Russian villages evacuated after fireplace at munitions depot

August 19, 2022
Index Investing News

Get the latest news and follow the coverage of Investing, World News, Stocks, Market Analysis, Business & Financial News, and more from the top trusted sources.

  • 1717575246.7
  • Browse the latest news about investing and more
  • Contact us
  • Cookie Privacy Policy
  • Disclaimer
  • DMCA
  • Privacy Policy
  • Terms and Conditions
  • xtw18387b488

Copyright © 2022 - Index Investing News.
Index Investing News is not responsible for the content of external sites.

No Result
View All Result
  • Home
  • World
  • Investing
  • Financial
  • Economy
  • Markets
  • Stocks
  • Crypto
  • Property
  • Sport
  • Entertainment
  • Opinion

Copyright © 2022 - Index Investing News.
Index Investing News is not responsible for the content of external sites.

Welcome Back!

Login to your account below

Forgotten Password?

Retrieve your password

Please enter your username or email address to reset your password.

Log In