The International Capital Market Association (ICMA) published its quarterly report for Q1 2024, which provides an assessment of market practice and regulatory policy. The foreword is by Fabianna Del Canto, co-head for EMEA Capital Markets at MUFG Securities and a member of the ICMA Board, and ICMA’s Quarterly Assessment is on stress and resilience in international capital markets.
There are thought leadership contributions on: a shift in the settlement cycle; sovereign bond market liquidity; EU Government retail-targeted bond issuance; risk factors and disclosure in DLT bond offering documents; SFDR: the evolving framework; and diversity, equity and inclusion in Italy. The Quarterly Report also includes international capital market practice and regulatory updates on Primary Markets, Secondary Markets, Repo and Collateral Markets, Sustainable Finance, and FinTech and Digitalisation.
Repo and collateral markets
In a section on repo and collateral markets, ICMA provided an update on its efforts with the European Banking Authority (EBA) on the LCR treatment of open reverse repos. The EBA’s statement in Q&A’s is: “reverse repos with open maturity not formally called for within the 30-day horizon and contingent on the option for the reporting institution of the reverse-repo to trigger the liquidity inflow, shall not be considered as inflows in the LCR.”
This conflicts with the general treatment of open securities financing transactions (SFTs) as rolling short-term SFTs, based on the relevant notification period of the transaction (which in most cases is 24 or 48 hours, and which is the contractual right of both parties), and which is also consistent with previous EBA guidance.
In its most recent letter ICMA highlights the contractual construct underpinning open reverse repos that is consistent with a short-dated reverse repo, as well as the divergence of the EBA’s interpretation and treatment from that of other major jurisdictions.
“Again, ICMA emphasises that the most significant outcome of the Q&A is increased operational risk and cost, as well as certain SFT activity moving out of the EU,” ICMA wrote in the quarterly report.
ICMA’s report also highlighted progress on repo clearing In the context of the ongoing discussions in relation to EMIR 3.0. ICMA’s European Repo and Collateral Council (ERCC) had raised some concerns related to proposals floated in the European Parliament. The proposed amendments to the MMF Regulation (MMFR) and the UCITS Directive put forward in the context of the EMIR review were meant to remove barriers to buy-side repo clearing, but also threatened to further constrain funds’ access to bilateral repo.
“Given the heavy reliance of funds on bilateral repo for funding purposes, this would have been highly problematic. Further to ERCC outreach on the topic, the proposals have now been modified in order to leave limits for bilateral repo unchanged while excluding CCP-cleared repo from those limits,” ICMA wrote.
ICMA is also set to launch a survey on repo sustainability in January after internal consultations.