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In its May meeting, the Bank of England’s Money Markets Committee raised concerns over fail rates in UK repo markets.
The discussion built on presentations to the Committee by Christopher Mundy, product manager for securities finance and collateral management at Euroclear, and Mike Jones, LCH head of securities clearing operations for RepoClear and EquityClear, which highlighted an increase in settlement fail rates in the gilt repo market against a backdrop of rising trade volumes.
The Money Markets Committee (MMC) indicated that repo fail rates are “still too high” and that this reflects poorly on the efficiency of the London market.
Some improvement had been made through a temporary extension of the delivery-versus-payment (DvP) window until 15:25 and through proactively chasing counterparties. However, the Committee indicated that it is important to investigate which types of counterparties were principally responsible for this increase in settlement fails and to set other diagnostics in place that will inform improvement in settlement practice.
In the minutes of this meeting, the Committee highlighted a number of high-level reasons for this rise in rate of settlement fails — including low liquidity levels, timing discrepancies in delivering cash and securities, and the fact that the settlement may sit within a chain of transactions, such that the failure of one trade in this chain may trigger failure of other downstream transactions.
These reasons for settlement failure are well understood and will come as no revelation to the Committee or the wider market.
The Committee also reviewed whether the impact of COVID-19 has contributed to a rise in settlement fails linked to staff turnover, working from home and a consequent rise in inexperienced staff working in the trade settlement environment.
In response, the Committee indicated that “it is eager to get to the bottom of why fails have increased” and to explore the impact of remedial measures, including use of auto-partialling and the effect of settlement fines, such as those introduced from February 2022 under the Settlement Discipline Regime of the Central Securities Depositories Regulation in the EU.
More broadly, the Money Markets Committee also reflected on a recent instance of borrowing shares to vote, an instance which was discussed in some detail in the May meeting of the Bank of England Securities Lending Committee (SLC).
In line with the comments made by the Securities Lending Committee (SLC), the MMC agreed that this constituted a breach of the UK Money Market Code. The MMC debated whether signatories should be made to “reattest” to the Code in a measure to remind signatories of their responsibilities under this component of the Code.
Securities Finance Times provides a more detailed evaluation of the events leading up to this debate before the Bank of England MMC and SLC in SFT Issue 306 (p 16ff) along with the implications for voting practice in UK markets.
