The International Capital Market Association (ICMA) released its quarterly report on market and regulatory practices.
As government bond yields across most major jurisdictions have crept towards multiyear highs and central bank rates are broadly considered to be at or close to their terminal rates, the risk of either higher and persistent inflation on the one hand or recession on the other remain finely balanced, underpinning the broadly defensive market tone and a focus on guarding against any form of complacency emanating from market participants and regulatory authorities alike.
Rightly so, market resilience continues to be broadly scrutinized against the backdrop of concerns centerd particularly around the combination of leverage, concentration and associated margin requirements in the less regulated sectors. This was a central theme to the numerous discussions held recently around the Eurofi financial regulation conference, and the regulatory agenda and priorities across all jurisdictions in which ICMA operates certainly reflect that.
EMIR 3.0
ICMA’s European Repo and Collateral Council (ERCC) is following closely the ongoing discussions in relation to EMIR 3.0, focusing particularly on proposals made in this context to remove certain barriers for the buy side to access repo clearing. More specifically, amendments to the MMF Regulation (MMFR) and the UCITS Directive have been put on the table that would exclude CCP-cleared trades from the counterparty limits imposed on funds in relation to derivatives and repo exposures.
While the ERCC is supportive of excluding CCP-cleared repo from these limits, there is a concern that the proposals that are currently being considered in the European Parliament may further constrain funds’ access to bilateral repo. Given the heavy reliance of funds on bilateral repo for funding purposes, this would be highly problematic. The ERCC is reaching out to the relevant policy makers in order to raise these concerns.
Risks and liquidity
Trade associations have a critical role to play in facilitating market stability and best outcomes, and that is why ICMA’s current work in areas such as assessing risks and building liquidity across the entire bond and repo ecosystem (via its Bond Market Liquidity Taskforce work), internationalizing best practice in the repo markets (through the Global Repo and Collateral Forum), using its convening power in the digitalization space to drive harmonization and consistency of standards (Common Domain Model, Bond Data Taxonomy and GMRA Clause Library) and playing a central role in the discussions around settlement efficiency and accelerated settlement, is so important.
Looking at building resilience through a different lens, the recent climate-related disasters being have witnessed should only redouble the market’s focus on the critical role the capital markets must play in climate mitigation and adaptation.