ICMA warns ECB on repo market instability

Industry concerns about current Eurozone repo and money market conditions
25 October 2022

While the environment of excess reserves and collateral scarcity has been the norm for a number of years, it has led to major market dislocations only on a limited number of occasions, notably certain year-end reporting periods and the COVID- induced turmoil of March-April 2020. However, as we enter a new phase of the monetary policy cycle, with the normalization of interest rates and associated market volatility, the potential for both the scale and frequency of such dislocations is likely to increase. The market focus and associated pricing for 2022 year-end is already indicating such concerns, as is the persistent widening of asset swap spreads of short-dated high-quality euro securities. For example, we have observed the 3-month Bubill-EURIBOR spread invert to around 60bp (reaching 100bp in early September), while the swap spread for the on-the-run Shatz has become ever more deeply inverted to around 110bp (having reached 120bp last month). Meanwhile, German General Collateral over year-end is implying a rate for the “turn” of between -10% and 12%, while the USDEUR FX Basis Swap is also implying a rate of around -14%. The recent September 2022 quarter-end, which saw the widest quarter-end dislocation between collateralized and uncollateralized rates since the introduction of the euro, has only added to these concerns.

The full letter is available at https://www.icmagroup.org/assets/Letter-to-ECB-on-repo-market-conditions-_-25-October-2022.pdf

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