This paper aims to explore potential green and sustainable advances in repo and collateral markets by assessing existing opportunities and potential risks.
The three main ideas covered are:
- Repo with green and sustainable collateral. A green repo market could be envisioned as one where buyers and sellers would only transfer bonds that are classified as green. The Green Bond GC Basket17 launched by Eurex in November 2020 is one example of this type of ‘green repo’ and other CCPs and tri-party agents are likely to offer similar baskets in the future.
- Repo with green and sustainable cash proceeds. The second intersection between repo and green and sustainable finance focuses on the cash leg of the repo. Rather than considering the underlying collateral assets,
a stricter definition of a green and sustainable repo might require the cash loaned in a repo transaction to be invested in green projects or activities – thereby directly boosting the sustainable finance ecosystem. - Repo between green and sustainable counterparties. A third dimension to be considered is the classification of the counterparties to the repo transaction, i.e., counterparties that meet certain sustainability criteria.
Next steps for ICMA
ICMA is now actively looking at ways to drive initiatives from a repo and collateral perspective. It aims to promote the importance of repo in sustainable finance and to establish a multi-dimensional standard approach to enable short-term financing and investment opportunities for green, social and sustainability bonds, and to ensure the fluidity of ‘responsible collateral’ through the financial system. This consultation paper, by opening up the debate for industry stakeholders, is the first step towards defining a standard approach for green repo and collateral.
The full paper is available at https://www.icmagroup.org/assets/documents/Regulatory/Repo/ICMA-ERCC-Green-and-sustainable-finance-role-of-the-repo-market-CP-220421.pdf