ICMA
Alexander Westphal, ICMA director, market practice and regulatory policy, speaks to Bob Currie about repo market performance, concerns over collateral shortages and the European Repo and Collateral Council’s working agenda for 2022
What were the standout events and developments that, from the ERCC’s perspective, most shaped repo markets during 2021?
2021 has been an eventful year, but one key theme that I would highlight is repo market transparency, as the industry has continued to make further advances on this front.
The transaction reporting regime under the Securities Financing Transactions Regulation (SFTR) was implemented in four phases, with the first beginning on 13 July 2020 and the fourth and final phase going live on 11 January 2021. In addition to our detailed work with members to implement and improve SFTR reporting, International Capital Market Association (ICMA) has been aggregating the public data points that trade repositories are required to release under SFTR. We publish these statistics week by week in a more accessible form on our website. Based on those figures, in September, ICMA published a report which looks in more detail at the key findings and trends from the first full year of SFTR reporting.
On reflection, the industry has engaged in an impressive collaborative effort in implementing SFTR. This is an ongoing process and the ERCC’s SFTR Task Force continues to meet periodically to review new regulatory guidance and work through a long list of reporting issues that firms are still facing. All of these discussions ultimately feed into the ERCC’s detailed best practice recommendations that we developed in relation to SFTR reporting.
The ERCC also continues to shine a spotlight on the repo marketplace through the bi-annual European Repo Market survey. In 2021 we marked the twentieth anniversary of the Survey which was just released in its forty-first edition. More recently, ICMA has also extended the exercise to the Asia-Pacific region, having just released the second edition of the Asia-Pacific Repo survey which we are publishing in collaboration with the Asian Securities Industry and Financial Markets Association (ASIFMA).
What were the primary risks and points of inefficiency confronting your members coming into 2021?
In terms of regulation, an important focus for ICMA has been to help the industry navigate the uncertainty surrounding the implementation of the mandatory buy-in (MBI) rules under the Central Securities Depositories Regulation (CSDR). The MBI regime has been a major concern for the industry and ICMA has long been arguing against the implementation of the current rules which we believe to be flawed and potentially damaging for market liquidity and stability. Not only would it discourage market-making more generally, but indirectly it would be a significant deterrent to lending out securities. ICMA was therefore very pleased with the decision by EU co-legislators not to implement the MBI regime in February 2022 and ESMA’s following de-prioritisation letter published just before Christmas which asks national authorities not to enforce mandatory buy-ins. ICMA, along with other trade associations, issued a complementary statement to confirm our understanding of the status quo in relation to MBIs.
That said, other measures, in particular cash penalties will still go ahead in February as planned and we are supporting members in their implementation efforts, having established a specific workstream to focus on cash penalties.
Beyond the concrete implementation challenges, we also believe that CSDR provides a good opportunity for the industry to come together to closely examine existing settlement processes and to take additional steps to improve settlement efficiency in Europe. Working in collaboration with other industry associations, ICMA launched a focus group to assess priorities for improving settlement efficiency, including the use of partial settlement, shaping of instructions, and auto-borrowing. We are about to release a white paper which recaps the key findings and recommendations.
Besides regulatory considerations, there has been a lot of focus on general repo market conditions and liquidity, in light of the ongoing COVID pandemic but also the impact of ongoing asset purchases by central banks. In April 2020, the ERCC published a detailed report on the performance of the repo market during the peak of the market stress caused by the pandemic, which showed that repo markets remained relatively stable and performed efficiently in a turbulent market. In 2021, we saw a return to calmer waters, but more recently we have been monitoring renewed concerns related to potential collateral shortages that were building up in the run-up to the year-end. As in previous years, we will publish a short report in January to assess how year-end conditions and financial reporting deadlines have impacted the repo market.
In a nutshell, what we observed with the 2021 year-end was that while trading was relatively orderly over the turn itself, levels reflect collateral supply bottlenecks as well as reduced capacity for intermediation. Core sovereign repo traded at the most expensive levels since the infamous 2016 year-end, and non-core printed at post-euros lows. It is also clear that many participants were positioning for year-end from as early as October. One could argue that this is not reflective of a healthy, functioning market.
Beyond the above, what has been top of the ERCC’s priority list during 2021?
One important topic that I should also mention is sustainability. While ICMA as a whole has of course played an important role in developing and promoting the sustainable bond market, with the green, social and sustainability bond principles, from a repo perspective the topic is still relatively new. But in 2021 we have definitely seen some momentum building within the ERCC. In April, we launched a market consultation to review different approaches to sustainable repo and the summary findings of this consultation were published in a follow-up paper released in September. Subsequent to the consultation, we have launched a new task force on repo and sustainability as a joint initiative of the ERCC and ICMA’s sustainable finance constituency.
Which locations offer strong opportunities as emerging and frontier markets for repo activity? How is ICMA’s ERCC supporting this activity?
As the name implies, the ERCC has traditionally focused on the European repo market. That said, we are keen to provide opportunities for ICMA’s global membership to actively engage in our repo work and this will be a priority for 2022. Many of the topics that we deal with are of course already inherently global — just take the Global Master Repurchase Agreement (GMRA) as an example which is employed extensively around the world, bringing standardisation to contracts and documentation for repurchase agreements.
We have also been actively involved in efforts to help develop repo markets in many emerging markets, working directly with authorities and participants in those markets, but also through a number of partnerships. For example, we are closely collaborating with Frontclear, a financial markets development company, with whom we recently held a series of webinars to discuss opportunities for the development of repo markets in Uganda, Nigeria and Ghana. ICMA also offers a comprehensive educational programme which is global in coverage. This, again, is an important mechanism for supporting the development of repo activities around the world, including in less developed markets.
What is top of ICMA ERCC’s working agenda for 2022?
As mentioned, repo and sustainability will definitely be a prominent topic, as our new taskforce on repo and sustainability starts to meet, looking at possible standards and best practices to clarify the role of repo in sustainable finance.
Another important focus that I haven’t mentioned yet is Fintech and electronification. ICMA is following closely the increasing importance of technology in repo markets and is pro-actively driving this agenda. The Common Domain Model (CDM) project, for example, builds on collaborative work with the International Swaps and Derivatives Association and the International Securities Lending Association to extend the CDM to repos and cash bonds. The first phase of the project has been implemented during 2021 and the development will continue in 2022. Another example in this area is the GMRA Clause Library and Taxonomy project which ICMA launched in October and which will continue during the coming year.
From a regulatory perspective, CSDR and SFTR will continue to keep us busy. We will closely monitor the imminent implementation of the CSDR cash penalties in February and its impact on settlement efficiency in Europe. But we will actively contribute to the upcoming discussions around the review of the mandatory buy-in rules, as we are waiting for the proposals from the European Commission which should be released around May. Besides, there is of course a whole host of other regulatory developments with important implications for the repo market which we are closely monitoring. This includes the ongoing review of prudential requirements in the EU, which involves various elements that are extremely relevant from a repo perspective. So overall, we can certainly expect another interesting and busy year.
