16 April 2021 - We are pleased to share with you the April edition of ICMA’s Repo and Collateral newsletter focusing on the key initiatives and workstreams undertaken by ICMA’s European Repo and Collateral Council (ERCC) as well as other relevant repo market developments.
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ICMA ERCC initiatives and workstreams
CSDR mandatory buy-ins
Feedback on CSDR Review Roadmap: On 1 April 2021, ICMA submitted its feedback on the European Commission’s Roadmap for the CSDR Review. Once again, ICMA posited that the mandatory buy-in framework, as currently drafted, requires significant revisions before attempting implementation. Furthermore, there are compelling arguments for not imposing a mandatory buy-in regime on the European bond markets, and that this could undermine market liquidity and stability. ICMA also referred to the recent letter co-signed by 15 market associations highlighting the challenges of implementing the mandatory buy-in regime while it is concurrently being reviewed and potentially revised.
Article 25 contractual remediation data: ICMA is supporting a data gathering initiative, coordinated by ISLA, whereby a number of associations are surveying their members to ascertain a sense of the scale of industry effort related to contractual remediation or repapering necessitated by Article 25 of the CSDR. The intention is to anonymize and aggregate the feedback in order to share it with the European Commission.
Reporting of issuer LEIs: ESMA and the FCA have both extended the forbearance period in relation to the reporting of Legal Entity Identifiers (LEIs) for non-EEA issuers under SFTR. The initial 12-month grace period granted by ESMA was due to come to an end on 13 April. Approaching this deadline, on 6 April, the FCA clarified that issuer LEIs for non-EEA third country issuers are not required under UK SFTR until at least 13 April 2022. ESMA issued a similar statement on 13 April, confirming that under EU SFTR issuer LEIs for third country issuers will not be made mandatory until 10 October 2022. The statements follow a joint industry letter co-signed by ICMA which was sent to ESMA, various NCAs, and the FCA on 8 March to reiterate industry concerns around the lack of availability of LEIs for issuers outside of Europe.
ESMA Q&A update: ESMA continue to expand their SFTR Q&As. The latest update was published on 6 April, adding one further topic to the document: the reporting of SFTs involving external portfolio managers. In total, the SFTR Q&As now cover questions on nine topics. ICMA has reviewed the latest additions with members of the ERCC’s SFTR Task Force and incorporated a few related changes in the latest internal version of the ICMA SFTR recommendations.
ESMA Data Quality Report: On 15 April, ESMA published its first report on data quality under EMIR and SFTR reporting. The report assesses progress made to date in relation to the quality of the data reported under both regimes and highlights areas for improvement, although it only includes limited details on SFTR given the relatively recent reporting start. Going forward this will be an annual review.
Settlement efficiency: Over the past months the ERCC has focused extensively on the challenges around firms’ intraday liquidity management and related opportunities for settlement efficiency. As a first result of this work, a number of best practice recommendations have been agreed and incorporated into the ERCC’s Guide to Best Practice in the European Repo Market. These targeted updates to the Guide were published on 30 March, covering recommendations related to the shaping of settlement instructions, partial settlement and hold and release functionality. The topic remains a key priority, as the ERCC is discussing additional measures to help reduce the level and impact of settlement fails. A set of further recommendations have been agreed at a cross-industry workshop hosted by the ERCC on 26 February and will be communicated in due course. The challenges around settlement efficiency and the related ERCC recommendations were discussed in more detail in ERCC Annual General Meeting on 30 March with a panel of market experts.
Repo & sustainability
ERCC discussion paper: ICMA is finalising a consultation paper on the role of repo in sustainable finance. The ERCC paper aims to explore the potential green and sustainable advances in repo and collateral markets by assessing existing opportunities and potential risks. In particular, it explores three possible intersections between the repo market and sustainable finance: 1. Repo with green and sustainable collateral; 2. Repo with green and sustainable cash proceeds and 3. Repo between green and sustainable counterparties. The paper seeks to acknowledge the complexity of the subject and to foster a broader understanding of a variety of views. Following review by the ERCC Committee and the ERCC Operations Group, the paper is due to be published next week. Once published, we welcome all interested stakeholders to respond to the consultation questions at the end of the document to share their views on the topic.
Common Domain Model (CDM) for repo and bonds: ICMA’s CDM Steering Committee and REGnosys have held regular meetings since the beginning of March to model repo and bonds in the CDM. The main focus to date has been to develop a conceptual repo model that is aligned with the GMRA and ERCC Best Practice Guide in the European Repo Market. In practical terms, this entails mapping out and categorising the processes and data elements in a repo such as sale and repurchase of securities, transfer of cash, initiation and termination dates, pricing (ie the repo rate) and associated data points and values. The conceptual model will then be translated into a logical model, with conditions and validation rules. The CDM is intended to be developed as a cross-industry model, building on previous ISDA and ISLA work. ICMA is closely coordinating with ISLA who is working with REGnosys on a CDM implementation for securities lending. The aim is to ensure consistency and benefit from synergies, where possible, between repo and securities lending. Further information on the CDM for repo and bonds can be found on ICMA’s CDM webpage.
ICMA Member firms who would like to contribute to this initiative are welcome to get in touch.
Repo market data
European Repo Market Survey: On 23 March, the ERCC released the results of its landmark 40th semi-annual survey of the European repo market. The survey, which calculated the amount of repo business outstanding on 9 December 2020 from the returns of 60 financial institutions, sets the baseline figure for the outstanding size of the European market at EUR 8,285 billion compared with EUR 7,885 billion in June 2020 and down from the record high of EUR 8,310 billion in the December 2019 survey. The December survey is a snapshot of the market at the end of an unusual year, with the COVID-19 pandemic having triggered market turbulence in February and March, and just before the end of the post-Brexit transition period. Survey results show the market tending to revert to long-term trends, although a few changes seem to have persisted, including the recent resilience of voice-brokered business and the sharp recovery in the share of core euro area government securities used as collateral. For a more detailed discussion of the latest survey results as well as the longer-term market trends over the past 20 years, listen to the ICMA podcast with Richard Comotto, the survey author.
SFTR Public Data: Following the end of the Brexit transition on 31 December 2020, the public data has been split into separate EU and UK segments. ICMA continues to collect and aggregate the data on a weekly basis for both EU SFTR and UK SFTR. For a more detailed breakdown and related charts, please visit our SFTR public data page.
Repo market data hub: ICMA’s webpage now includes a repo market data hub, which is refreshed on a monthly basis. Currently this includes:
The data is sourced from Bloomberg and CME Group Benchmark Administration Limited. Any data vendors who would like to contribute to the repo market data hub are encouraged to reach out to their ICMA contact.
Other repo and collateral market developments
BCBS minimum haircuts: On 31 March 2021, ISLA and ICMA submitted a response to the Basel Committee on Banking Supervision’s Consultation on the technical amendments for minimum haircut floors on Securities Financing Transactions. While the associations welcome the proposed technical amendments are welcomed by the memberships, in particular for borrowers (the counterparty paying the haircut on the collateral posted), they request that all transactions where the bank is paying a haircut on the collateral posted to the securities lender are deemed out of scope of the minimum haircut floors, in accordance with CRE564, and provided for in a separate amendment.
Global SFT data collection: On 12 April, the FSB published a first set of FAQs in relation to the global initiative for Securities Financing Data Collection and Aggregation. The FAQ document complements the FSB’s existing SFT Data Standards and the related reporting guidelines and aims to promote a common approach and help national implementation of the global standards. The first version of the FAQs covers 27 questions and will continue to be updated as market practice evolves.
GMRA legal opinions: ICMA obtains and annually updates legal opinions on the GMRA in over 65 jurisdictions worldwide. On 15 April, ICMA published updates to legal opinions in 60 jurisdictions. The 2021 GMRA opinion updates cover both the enforceability of the netting provisions of the GMRA, as well as the validity of the GMRA as a whole (subject to certain limitations). Furthermore, the 2021 GMRA opinion updates address the issue of recharacterisation risk (in respect of both the transfer of securities and the transfer of margin). While all 2021 GMRA opinion updates cover, as a minimum, companies, banks and securities dealers, most opinions now additionally cover insurance companies, hedge funds and mutual funds as parties to the GMRA. Where relevant, each opinion also covers the central or national bank of the relevant jurisdiction as a party to the GMRA. The ICMA GMRA legal opinions are available to ICMA members on the ICMA website.
Papers and reports
Congruent Financial Regulation, Metrick, A, and Tarullo, D, BPEA Conference Drafts, March 2021
The authors propose that under a congruence principle, regulators could mitigate the risk built up in non-bank financial institutions using a coordinated combination of capital requirements, minimum haircuts on repo transactions, and margining rules on futures exchanges and central clearing parties
Dollar funding of non-US banks through Covid-19, Aldesoro, I, et al., BIS Quarterly Review, March 2021
The authors findings point to changes in funding relationships that could have long-lasting effects on the functioning of dollar funding markets.
Scott Skyrm on the Dynamics of the Repo Market in 2021, The Bridge, Podcast, April 2021
Skyrm posits that changes in overnight repo rates can be anticipated by tracking how much Treasury debt is being issued on net, and how much the Fed is going to buy.
Meetings and events
ERCC Annual General Meeting: On 30 March, the ERCC held its latest Annual General Meeting. The livestreamed two-hour session, supported by LCH, featured a panel with the ERCC chairs to discuss priorities for 2021, an overview of the results of ICMA’s 40th European Repo Survey, as well as a discussion with market practitioners on the challenges and opportunities around settlement efficiency. Furthermore, ICMA was delighted to welcome Fiona van Echelpoel, Deputy Director General at the ECB, who delivered a keynote address, and Corentine Poilvet-Clediere, Head of RepoClear, Collateral and Liquidity at LCH SA, who provided the concluding remarks. A recording of the live event is available on the ICMA website, along with a number of short pre-recorded updates on other key ERCC initiatives not covered at the event itself.
ERCC professional repo market course: This year the ERCC will be hosting again its annual Professional Repo Market and Collateral Management Course. The seminar will be delivered in an online format over four morning sessions on 27-28 September and 4-5 October. Further details will be announced in due course.
ICMA Education: upcoming livestreamed repo and collateral courses
Securities Lending & Borrowing: Operational Challenges, 3-11 June, 10.00-13.30 CEST
Understanding the GMRA, 16-24 June, 10.00-13.30 CEST
Introduction to Repo, 13-21 September, 10.00-13.30 CEST
Collateral Management, 4-12 October, 14.30-18.00 CEST