ICMA writes to ECB raising concerns about Eurozone repo and money market conditions

26 October 2022 The International Capital Market Association (ICMA) has written to the ECB expressing industry concerns about current conditions in the Eurozone repo and money markets, and the risk that rising dysfunction in the market could imperil the transmission of monetary policy. The letter is co-signed by ICMA’s dedicated constituencies representing the repo and collateral markets, the commercial paper and certificates of deposit market, the secondary bond markets, as well as the asset manager and investor community.

The letter points to a number of observations related to pricing dislocations, largely as a result of an environment of excess reserves and collateral scarcity, particularly around quarter-end reporting dates when the capacity for bank intermediation is reduced. As we enter a new phase of the monetary policy cycle, with the normalization of interest rates and associated market volatility, the potential for both the scale and frequency of such dislocations is likely to increase. Year-end has become a regular point of dislocation for the Eurozone repo and money markets, and the current indications are that the upcoming 2022 “turn” could be particularly challenging.

The letter also acknowledges policy initiatives adopted by other central banks intended to manage the disequilibrium of excess liquidity and collateral scarcity and to ensure the smooth transmission of monetary policy. Improving the capacity of banks to intermediate in repo and money markets (as well as bond and derivatives markets more broadly) could also help to contribute to market stability and resilience.