BoE MMC committee gives mixed review on repo and seclending fail progress

The Bank of England’s (BoE’s) UK Money Markets Code sub-committee published its minutes from an October meeting.

It was noted that there had been an increase in settlement efficiencies (97%) in the period between May and early September. Over the last two weeks of September and early October, there had been a significant increase in gilt repo volumes and the increase in the level of fails was commensurate with the increased volumes.

Since the date of the last meeting Euroclear have made some changes to support the market and these include a permanent extension to the CREST diary, extending the DVP settlement window. Furthermore, auto splitting is to go live on 21 November 2022. There have been no further issues with the CREST system.

Regarding securities lending fails, results from an informal monthly survey (covering the period 2019 to the present) of some of the big institutions with regards to ‘fails’ for securities lending transactions were highlighted. This indicated a high level of settlement rates for open leg trades, settlement rates of between 95% and 97%. On the other hand, the settlement rates for closing leg trades are quite poor, generally in the 85% range for both equities and fixed income.

The introduction of the Central Securities Depositories Regulation (CSDR) has led to an improvement, to 90%, in settlement rates for return leg trades in equities. Settlement rates for fixed income, on the other hand, have been falling steadily this year and are currently at 79% (based on aggregated figures for government and corporate bonds).

The biggest reason for return leg fails is due to brokers not having the stock available to return (in equities space) and in fixed income due to illiquidity in the corporate bonds market. Data obtained from the European Central Bank website showed settlement rates for TARGET2- Securities (T2S) over the period January to June 2022, both in value and volume, of around 93%-95%. The BoE committee agreed to monitor settlement rates and also noted that it is open to setting up a small working group to investigate the issue further. It was generally agreed that such poor settlement discipline was not acceptable.

Other topics covered were: diversity and inclusion initiatives, highlighting the work of the International Securities Lending Association (ISLA); impact of the return to office; and agreeing text of the “Statement of Commitment” letter to remind signatories of the Money Market Code of obligations.


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