Repo and collateral markets in the midst of tightening monetary policies
Repo and collateral markets
This panel looked at the challenges faced by the financial market following the return to a positive interest rate environment and the uncertainty linked to current macro-economic conditions. The move from QE to QT sees central banks placing securities back into the market at a time when banks' needs for collateral is rising. So far this has not lead to any more dislocation.
- Nicola Danese, Managing Director, Head of European Fixed Income - Tradeweb
- Amanda Butavand, Managing Director, Head of Short Term Market Sales Europe - Credit Agricole
- Thomas Hansen, Head of Short Term Markets/Securities Finance London Branch - Banco Santander
- Ed Huntsman, Global Co-Head of Spread Product Financing - Citi
- Money market rates are 370bps higher than at the same time in 2022, while the ECB's balance sheet is €1 trillion smaller.
- Rising interest rates and tighter monetary policy are making people focus on collateral and funding as their costs have risen.
- The market does have the capacity to absorb all the securities that are coming back into the market, even the non-HQLA from August.
- TLTRO is coming out of the central banks and into the market again at the same time that banks need more and more collateral.
- The repo market is becoming more centralised as the buyside wants more diversification in its funding sources.
- The repo market was very stable in the months leading up to the conference.
- Going forward the repo market is likely to become more autonomous again as central banks revert to the role of being lenders of last resort.
- Despite all the volatility and exogenous events, the market has actually become more efficient with the percentage of trades being successfully completed rising from 92% to 94% over the recent past.
- This is due to policies that have been implemented that have increased prevention, remediation, and punishment.
- The cost of fails and the cost of tying up liquidity keeps on rising as interest rates maintain their upward trajectory. This increases the incentive for efficiency.
- There have been a number of new repo platforms that have been released in the last few years. This has led to an increase in the number of RFQs coming into the banks. This in turn has created a need for more IT budget to try to automate this increase in RFQs.
- Whilst it is positive to see the number of platforms looking to enter the repo market, it is difficult to manage all the different platforms.
- A lot more needs to be done to upgrade the infrastructure around the repo markets. Most of the work undertaken in the last five years has been about regulatory reporting. It now needs to focus on connectivity and automation.
