Today ICMA has published a briefing note on the European repo market at 2018 year-end. The note documents and analyses repo market behaviour through 2018 year-end. Compared with the previous two year-ends, 2018 was relatively uneventful. Core Euro GC and specials did come at a premium leading up to the turn but then cheapened significantly into year-end itself. Meanwhile, non-core GC saw scarcely an impact, with only some specials becoming difficult to find. The short-date Gilt repo market tightened slightly, however term spreads widened notably, seemingly caused by the introduction of UK bank ring-fencing. The US treasury repo market, however, was the real surprise, with an unexpected scramble for cash sending rates notably higher.
While the markets, for the most part, were fairly orderly, it is clear that a number of year-end pressures and risks persist. Banks still face pressures to reduce balance sheet, and so their intermediation capacity, in order to comply with a number of entity or jurisdictional specific reporting obligations, including Basel ratios (primarily Leverage Ratio), national bank levies, and the G-SIB capital surcharge. Positioning is also an exacerbating factor, both in terms of bonds/collateral and FX – which is highlighted by the spike in USD rates.
However, since 2016 it would seem as if the market has become more aware of these risks and better prepared in terms of managing its year-end financing and collateral requirements. Locking-in funding early, however, comes at a premium. But, while the extreme levels and dislocations of the 2016 turn have not been repeated since, there is still plenty of quantitative and qualitative evidence to suggest that year-end pressures persist, and that access to repo and lending markets for many firms is impaired.