The European Systemic Risk Board (ESRB) published its response to the European Commission’s consultation assessing the adequacy of macroprudential policies for nonbank financial intermediation (NBFI).
One aspect that was highlighted was that central clearing can enhance the resilience of government bond cash and repo markets, which have experienced episodes of illiquidity and market dysfunction in recent years.
The functioning of these markets is critical for the financial system, including for NBFI entities, whose footprint in these markets has been growing. But while centrally cleared transactions are subject to margin requirements, a lack of such requirements for bilaterally cleared transactions may disincentivize greater central clearing in these markets.
“The European Commission should consider introducing margin requirements in bilaterally cleared government bond cash and repo transactions and ways to facilitate the central clearing of such transactions. This would incentivize a move to central clearing, thereby reducing the risk of episodes of illiquidity and funding stress, and contribute to a much-needed strengthening of the resilience of these markets,” according to the report.