International Capital Market Association ICMA
IC ICMA European Repo an and Coll ollateral Cou ouncil il - Ge General Meetin ing De De-mystify ifyin ing Rep epo: : Im Impacts on Fina inancia ial l St Stabil ilit ity and the Rea eal l Economy 14 November 2017, Brussels
ICMA European Repo and Collateral Council General Meeting 14 November 2017, Brussels Welcome Remarks Godfried De Vidts Chairman ICMA ERCC
ICMA European Repo and Collateral Council General Meeting 14 November 2017, Brussels The financial crisis – the role of repo How did problems in the subprime mortgages cause a systemic event? Our answer is that there was a run in the repo market. Gary B. Gorton and Andrew Metrick (2012): “Securitized Banking and the Run on Repo”, Journal of Financial Economics The crisis came when crashing housing prices raised doubts about securitisations and when chains of inside liquidity created by repos with re-hypothecation and re-use of the same securities collapsed with rising haircuts and resulting illiquid markets . Vítor Constâncio, Vice-President of the ECB, at the second ECB Macroprudential Policy and Research Conference, Frankfurt am Main, 11 May 2017 If the repo market wouldn´t have grown as it did, the crisis that followed the demise of Lehman Brothers would have been, at least in Europe, even more damaging or the burden on the ECB to attenuate its effects would have been even heavier. Francesco Papadia , former Director General, Market Operations, ECB, at the ‘Future of the European Repo Market’ conference, London, 11 June 2013
ICMA European Repo and Collateral Council General Meeting 14 November 2017, Brussels The regulatory discrepancy Belie elief no no 1: 1: Coll ollatera ral l is is go good Regulation defines and requires ‘good quality’ collateral for: Secured lending and borrowing Margining centrally cleared transactions Margining non-cleared derivate transactions
ICMA European Repo and Collateral Council General Meeting 14 November 2017, Brussels The regulatory discrepancy Belie elief no no 2: 2: Rep epo is is ba bad The repo and securities lending markets are a source of: Excessive leverage Procyclicality Interconnectedness
ICMA European Repo and Collateral Council General Meeting 14 November 2017, Brussels If only there was a market for collateral…. Some part Som participants s sit sit on on col ollateral al Som Some part participants s ar are lon long cas ash h bu but and do and do no nothing with ith it it ne need col ollateral al So Sovereign Wea ealth Fu Fund nds Insu nsurance Fun Funds Investment Ban Banks Cen Central l Ban Banks Co Corp rpor orate Treas easurie ies Mo Mone ney Mar Market Fun Funds As Asset Ma Managers Pen ensio ion fund funds Commercia Co ial l Ban Banks Hedg Hedge Fun Funds Som Some part participants s ar are lon long coll ollateral Some part Som participants s ha have the wrong but ne bu need cas ash kind of of col ollateral
ICMA European Repo and Collateral Council General Meeting 14 November 2017, Brussels Wait, there is! Som Some part participants s sit sit on on col ollateral al Som Some part participants s ar are lon long cas ash h bu but and and do do no nothing with ith it it need col ne ollateral al So Sovereign Wea ealth Fu Fund nds Insu nsurance Fun Funds Investment Ban Banks Cen Central l Ban Banks Repo Co Corp rpor orate Treas easurie ies Mark arket Mo Mone ney Mar Market Fun Funds Asset Ma As Managers Pen ensio ion fund funds Co Commercia ial l Ban Banks Hedg Hedge Fun Funds Som Some part participants s ar are lon long coll ollateral Some part Som participants s ha have the wrong but ne bu need cas ash kind of of col ollateral
ICMA European Repo and Collateral Council General Meeting 14 November 2017, Brussels Collateral fluidity Collateral Demand ≡ Available collateral supply x Collateral fluidity The repo market is the ‘pump’ that sources, prices, and mobilizes collateral through the financial system. If we want efficient and resilient markets underpinned by collateral, then we need a vibrant and liquid repo market. You can’t have one without the other.
ICMA European Repo and Collateral Council General Meeting 14 November 2017, Brussels Tilting at windmills…
Monetary Policy and Repo Market in the Euro Area ICMA European Repo and Collateral Council General Meeting Pradhan (2017) Monetary Policy and Repo Market 1
Euro Area: a strong recovery Euro Area Real GDP Growth (Percent) 3 2 1 0 -1 -2 -3 -4 -5 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Source: World Economic Outlook (October 2017). Pradhan (2017) Monetary Policy and Repo Market 2
All countries growing: lowest dispersion since inception Euro Area Real GDP Growth (Percent) 15 10 Max 5 0 Euro Area -5 -10 Min -15 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Source: World Economic Outlook (October 2017). Note: includes all 19 countries. Ireland growth rate in 2015 is excluded. Pradhan (2017) Monetary Policy and Repo Market 3
ECB price stability objective: widening dispersion Euro Area Inflation (percent) 4 Euro Area Germany Italy 3 "close to but below" 2 percent objective 2 1 0 -1 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Source: World Economic Outlook (October 2017). Pradhan (2017) Monetary Policy and Repo Market 4
Money markets dominated by secured lending Euro Area: Secured vs. Unsecured Money Market Lending (Cumulative Quarterly Turnover, Trillions of Euros) 35 30 Secured 25 20 15 10 Unsecured 5 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: ECB - Money Market Survey. Pradhan (2017) Monetary Policy and Repo Market 5
Collateral scarcity may become a challenge … Scarcity premium due to lower collateral availability (esp. for non-banks but also CCPs) and persistent arbitrage opportunities as banks have limited balance sheet capacity (e.g., lower basis trading) Pradhan (2017) Monetary Policy and Repo Market 6
Collateral: lower ECB asset purchases next year but still very significant PSPP expected to displace €470 billion of government debt in 2017 but less next year ( €83billion) amid positive net debt issuance Pradhan (2017) Monetary Policy and Repo Market 7
Collateral: Target 2 imbalances widening again Pradhan (2017) Monetary Policy and Repo Market 8
Collateral: ECB asset purchases contributing to Target 2 imbalances? This puts a premium on the efficient movement of collateral (via repo markets) to help reduce fragmentation by reversing cross-border flows of (excess) liquidity. Pradhan (2017) Monetary Policy and Repo Market 9
Market Functioning: liquidity and collateral flows improving Pradhan (2017) Monetary Policy and Repo Market 10
Considerations for well-functioning repo market through wider collateral availability Negative repo rates are not a new phenomenon ( specials), and NIRP/QE have not caused material market disruptions. But some aspects of Eurosystem securities lending and infrastructure raise issues: Develop common active securities lending solution for all (or most) NCBs (esp. for those weakly integrated in custodial network through central securities depositories (CSDs)) Harmonized modalities (e.g., pricing, haircuts, eligibility) and higher limits on lending per issue Resolve interoperability challenges of trading platforms (CCP/tri-party repo): integrated securities settlement under T2S for “central bank money” not available for “commercial bank money” Dysfunctional repo market would result in: Less efficient cash markets Limited market access by non-banks for hedging, and Difficulties for eventual monetary policy normalization Pradhan (2017) Monetary Policy and Repo Market 11
ICMA European Repo and Collateral Council General Meeting 14 November 2017, Brussels Panel 1: Macro-financial Linkages of Repo Markets and Financial Stability Implications Moderator: Andreas Jobst , Adviser to the Managing Director and CFO, World Bank Panellists: Peter Grasmann , E1 Unit Head, Directorate E, DG FISMA, European Commission Steffen Kern , Head of Risk Analysis and Economics Department, ESMA Michael Manna , Head of Fixed Income Financing Trading Europe, Barclays Alberto Gallo , Head of Macro Strategies, Algebris
The Algebris View | Volatility, Fragility and Repo Markets ICMA Conference, November 2017 Alberto Gallo, CFA Portfolio Manager, Algebris Macro Credit Fund (UCITS), Head of Macro Strategies Contact us Call +44 203 196 2450 Email AlgebrisIR@algebris.com Visit www.algebris.com c Page 1 Algebris (UK) Limited is authorised and regulated by the Financial Conduct Authority. This document is for private circulation to professional investors only.
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