The ICMA European repo and Collateral Council (ERCC) has published a report on the performance of the European repo market at year-end 2020, focused on the euro, sterling, US dollar and Japanese yen markets and based on market data and accounts provided by market participants (both sell-side and buy-side). This is the 5th in the series of annual reports, which began with an analysis of the unprecedented dislocations in the euro denominated repo market at the end of 2016.
After the past three relatively uneventful year-ends, concerns about potential year-end dislocations began to build as early as October 2020, following the largely unexpected drop in rates at the September quarter-end. Market participants were wary of a potential collateral squeeze, citing significant excess reserves (which had increased from €1.7 trillion at the end of 2019 to €3.2 trillion by the end of October 2020) and a reduced supply of collateral (euro sovereign issuance less central bank purchases had taken €300 billion of collateral out of the market during 2020). A longer than usual (four-day) turn compounded any unease.
In fact, the general view is that the turn was relatively subdued, with the buy-side looking to execute as much of their funding requirements as early as possible, while the banks went into year-end with more balance sheet than usual to play with. A common concern, however, relates more to conditions over the next twelve months, particularly in the case of the EUR market, given the widening of the PEPP envelope and the prospect of an even smaller EGB collateral pool; more so than the perennial uncertainty related to banks’ balance sheets and dealer capacity. A further consideration for the immediate future is the impact of Brexit on repo market liquidity, as well as for euro denominated derivatives, particularly in light of the migration of the euro equity markets from the UK to the Eurozone on 4 January 2021. The end of the pension fund industry’s exemption for mandatory clearing could also increase demand for euro collateral transformation, an issue currently under discussion with the relevant authorities.
The ICMA ERCC will continue to monitor closely market developments, highlighting potential risks and dislocations to the smooth and orderly function of the market. In doing so, it will remain in close contact with the relevant authorities and regulatory bodies.