The repo market is already suffering even though some of the
new capital rules will not come into effect for another few
years, market participants warned at the Euroclear Collateral
Conference in May in Brussels.
In a panel addressing balance sheet resources, moderator
Michael Manna, head of fixed income financing and money market
distribution, Emea, Barclays, said: "Banks are unlikely to wait
until 2019 to be fully compliant with new minimum standards for
capital and leverage. As a result the [repo] system is already
shrinking and velocity of collateral is slowing down."
However, an audience poll revealed that the largest group,
27% of delegates, expected the proportion of their balance
sheet allocated to repo to grow marginally bigger over the next
Olly Benkert, head of global repo, interest rate products
group, Goldman Sachs International, said: "I'm surprised that
many delegates are saying their repo businesses are getting
bigger because I would expect that certainly bank-regulated
balance sheets would have to come down over a period of time,
but maybe that's over a longer period than I've
Indeed, a fifth of delegates said their repo balance sheet
would become significantly smaller, closely followed by 19%
saying it would become marginally smaller.
Stefano Bellani, MD and head of Emea and emerging markets
financing, JPMorgan: "Clearly the business is becoming more
expensive, whether that be additional capital or other
regulation that's restricting the intermediation that banks can
provide to the market. We are coming off too [in terms of
balance sheet] but not remarkably."
Benkert asked the panellists how much of the recent
volatility in the repo market was due to the scarcity of
available capital on intermediaries' balance sheets.
Sylvain Bojic, director at Societe Generale CIB, responded:
"While it is possible, I doubt that [the volatility] we've
observed in the past few weeks has been linked to balance sheet
constraints. Rather, it's linked to funding or treasury
When asked whether the central banks should intervene to
address the volatility, Benkert said: "I don't think the view
is that central bankers should get involved as they recognise
that market forces are good thing. But there is an
understanding that a re-pricing of repo and therefore a
re-pricing of bond markets to some extent, which is a cost to
taxpayers, may be a deal worth doing in exchange for resiliency
of the financial system. Some of that pricing has yet to be
seen in the market."
Click on the hyperlinked titles below to read more coverage
from the Euroclear conference:
Appeal of collateral downgrades to
Beneficial owners fear onerous regulation
Poll: regulation casts gloom on securities