EPTF. Godfried De Vidts Chairman, ICMA European Repo & Collateral Council Brussels, 19 May 2016

Transcription

1 EPTF Godfried De Vidts Chairman, ICMA European Repo & Collateral Council Brussels, 19 May 2016

2 International Capital Market Association (ICMA) Introduction to ICMA» ICMA s mission is to promote resilient & well functioning international debt capital markets Such markets are necessary for economic growth, and benefit market participants and their clients alike ICMA Issuers Intermediaries Investors Infrastructures» ICMA is a unique organisation and an influential voice for the global capital market Providing market conventions and standards underpinning the international debt market for almost 50 years ICMA currently has 500 members based in approximately 60 countries o around 80% of members are European o spanning the market, members include issuers, intermediaries, investors, and infrastructures 2

3 European Repo and Collateral Council (ERCC) Introduction to the ICMA European Repo and Collateral Council (ERCC)» ICMA practices support the three key aspects of the international debt capital market Primary Market (origination) Secondary Market (trading) Financing Market (repo = collateral)» Since the early 1990 s, ICMA has played a significant role in promoting the interests and activities of the international repo market, and of the product itself The European Repo Council (ERC) was established by ICMA in late 1999 As from 4 Dec. 2015, ICMA ERC renamed as the ICMA ERCC o reflecting that repo desks can increasingly be equally considered to be collateral desks o collateral management is controlled from the trading desk, supported by repo/collateral operations processes ICMA ERCC plays a significant role in nurturing the development of the repo market o bi-annual surveys of the European repo market o Global Master Repurchase Agreement (GMRA), now supported by 66 (annually updated) legal opinions o market education, including repo and collateral specialist courses; and o authoritative reports including Avoiding Counterproductive Regulation in Capital Markets ; Collateral is the New Cash ; & The Current State & Future Evolution of the European Repo Market 3

4 Definition of Liquidity and Collateral Management Collateral and liquidity management can be defined as the optimal management of credit, collateral, capital and all related execution, pricing, operational, documentation, and risk management of a portfolio across all products, all business units, and all locations. Collateral study University of St. Gallen 4

5 Collateral Fluidity: The Pump The integrated bank funding function The market-making service of the bank funding desk Treasury * Liquidity Management Money Market Funds CCPs Hedge Funds Prime- Brokerage * Securities services and financing Collateral & Liquidity Management Repo Desk * Financing * Matchedbook Agency Lenders Bank Funding Desks Institutional & Corporate Treasuries Equity Finance/ Stock Loan Operations * Trade Settlement * Margining Central Banks Pension Funds/ Asset Managers 5

6 Who Uses Repo and Why? Sources & Uses of Cash & Collateral being deployed to service real-economy needs Hedge funds Asset management Financing of securities Wholesale funding Other Low-cost, widespread access to funding Collateral alignment, including x-currencies Support for central bank liquidity management Primary dealer support Reasons for using repos Interbank repo market the hub for collateral management links sources of cash demand to cash supply Open market operations Bond market liquidity regulator Hedging and pricing derivatives Improve settlement efficiency / permit faster settlement times MMFs Custodial agents Corporate treasuries Insurers / reinsurers Pension funds Cash Securities Eurosystem / Central Banks QE: Extraordinary monetary policies, now including CSPP, impinge upon the standard linkage of central banks and markets 6

7 Repos Underpin the Financing of EU Government Debt Origination Government Issues sovereign debt via DMO Primary dealers Banks licensed to operate in primary sovereign debt market Investors Initial purchasers investing via primary sovereign debt market New issue price reflects secondary trading prices for existing issues Secondary trading Primary dealers Also act to offer market for sovereign debt trading Investors Buyers and sellers altering positions in secondary sovereign debt market Secondary trading price depends upon the cost for the dealer to finance positions (long or short) taken to satisfy demand Financing Cash Securities Repo market Banks conducting repo financing Higher repo market costs or lower repo market liquidity feed into more expensive new issuance Financing cost for dealer set by repo market cost to lend or borrow sovereign securities 7

8 Collateral Management Process Collateral sources: Owners Pension funds (Re)Insurers Hedge funds Sovereign funds Mutual funds Alternative funds Dealers Collateral sources: Holders Custodians (I)CSDs Prime brokers Lending agents Evolving Global Collateral Standards - ISIN - LEI - ISO UTI Collateral outcome Right type Right place Right time Right amount Right currency In the hands of the right counterparty Collateral Management Process Collateral uses: Counterparty limits Collateral selection Availability from sources Credit policy guidelines Collateral optimisation / mgmt Allocation & monitoring Operational controls Collateral processing Legal agreement: GMRA Repo market funding Central bank funding LCR HQLA / NSFR EMIR (un)cleared derivative margins Secured loans Payments processing Determine type Agree currency & amount incl. haircuts/margins Satisfy time varying drivers: LCR/NSFR; Leverage/RWA Alternative uses Instruct delivery Right place & time Correct party s account Infrastructure T2S: CeBM settlement in transition ICSDs: CoBM settlement (Bridge) 8

9 The New Regulatory Challenge for Banks Pre-crisis rules Capital: Risk weighted capital rules Large exposure limits Low cost, Low margin High volume Profitable Bank Regulatory Requirements Bearing on Repo Financing Post-crisis rules Capital: Risk weighted capital rules - stricter Large exposure limits Leverage capital rule Capital buffers TLAC / MREL Stress tests Liquidity: LCR NSFR Stress tests QE Derivative margins: cleared & uncleared Mandatory haircuts Other: Trade repository reporting Pre-/Post-trade transparency for venue trading CSD mandatory buyins & fail penalties 48hr resolution stays High cost Lower margin High volume Pressure to optimise: Marginal trading decisions Collateral pools/mgmt Cpty/liquidity risk mgmt 9

10 Summary of Concerns to Address Topical Concerns Needing to be Addressed» Market infrastructure improvements are needed to support efficient collateral management Key overall objective is to pool collateral, thereby boosting collateral liquidity / efficiency o evolve to a single pipe connecting (I)CSDs & CCPs, across multiple collateral types thereby eliminating today s requirement to process multiple realignments of collateral in support of post-trade activities o realisation of T2S efficiencies will be limited whilst custody / markets cut-off differences persist via service level agreements / cut-offs for the traditional banking/investor models ie fund manager/prime broker/custodian/agent o pending any future rationalisation, new EMIR margin rules will complicate processing and inventory management o infrastructures processing SFTs need to identify / distinguish SFT product types versus other transactions o enhance take up of standardised trade matching & affirmation (TMA) and use of straight-through processing (STP) COGESI has identified a number of key collateral management harmonisation activities (next slide)» Specific refinements to regulations can smooth counterproductive impacts CSDR mandatory buy-ins are impractical and should be delayed pending creation of an optional regime SFTR reporting requirements should be streamlined to a minimum rather than seek to cover all details; and the TR data it generates should become the source for satisfying all other official data needs re SFTs Duplicative reporting burdens should be revisited, including dual (rather than single-sided) SFTR reporting to repositories; and unnecessary MiFIR transaction reporting of SFTs with ESCB counterparties Temporary stays on close out rights should be applicable across counterparty types (including CCPs) and only used subject to the maintenance of ongoing daily risk margining Haircuts are the subject of proportionate FSB recommendations, yet regional/national implementation approaches are yet to be agreed these should not go beyond the FSB recommendations 10

11 Contact Group on Euro Securities Infrastructures COGESI: Harmonisation Activities for Collateral Management Arrangements» COGESI is listing key activities for harmonisation of collateral management arrangements Priority 1 items essential for CMU and will help meeting market participants regulatory requirements in a more efficient and effective way (in particular the EU legal acts related to post-trade) o improving collateral mobility requires (i) effective cross-border connections; (ii) interoperable (triparty) collateral management processes (with prior bridge enhancement); and (iii) improved collateral management practices o establish collateral holding & segregation structures to offer a central/single intraday view on collateral inventories across borders and segregated collateral accounts, taking into account rules & requirements for segregation o international standard messages (eg ISO20022) should be used for collateral processes (mobilisation, margin & dispute/fails) with harmonised data elements and unique identifiers; and consistent reporting frameworks should be specified Priority 2 items contribute to operational efficiency, by addressing challenges to operational environment and facilitate the on-boarding of buy-side participants to collateralised transactions o harmonisation of collateral procedures for foreign collateral (non-euro denominated) o harmonisation of procedures for non-marketable assets (credit claims) o multilateral agreements for collateralisation This broad ranging initiative can lead to the elimination of many barriers to efficient cross-border collateral management but much of what is considered needs extending from euro-area to pan-eu level 11

12 ESCB Market Infrastructure Developments ESCB: Vision for the Future of Financial Market Infrastructure» The ESCB s correspondent central banking model (CCBM) was introduced with the euro in January 1999 Ensures that all assets eligible for use in monetary policy operations or to obtain intraday credit in TARGET2 are made available to all ESCB counterparties, regardless of the location of the assets or the counterparty» Following TARGET2 harmonisation of cash settlement, transition to T2S is harmonising securities settlement But these only solve CeBM settlement and CoBM settlement will remain an essential complement Parallel efforts to enhance CoBM settlement are equally important» The ESCB s Vision for the future of financial market infrastructure contemplates Future real-time gross settlement services arising from T2S; Instant payments processing; and Common Eurosystem collateral management system (ECMS) o The former Collateral Central Bank Management (CCBM2) initiative contemplated, alongside integrated securities settlement in central bank money under T2S, a harmonised collateral management system for ESCB central banks o Harmonised collateral processing now needs to play a key role at the heart of the ESCB vision o The aim should be that collateral can be mobilised as simply as cash o and this concept should also be globalised 12