Repo: underpinning the stability of the financial market system

发布时间:2018年12月20日 14:19

“D’abord réfléchir, après agir” is a useful principle which can be applied on many occasions and for many reasons, and it is exactly what should have happened ten years ago in the panic after the Lehman default. As a community we had taken, well before the crisis, various measures that should have been noticed by those scrambling to respond to what proved to be a lack of confidence in financial markets. Many articles in recent weeks have reflected on the crisis and the response to it, but my gut feeling is that little notice will be paid even now to the essential activity that actually helped markets to recover. The oil on the wheels of financial markets is provided by secured financing.

A highly respected ex-central banker said it all: “If the repo market would not have grown as it did, the crisis that followed the demise of Lehman Brothers would have been, at least in Europe, even more damaging or the burden on the ECB to attenuate its effects would have been even heavier” (Francesco Papadia, former Director General, Market Operations, ECB, at the Future of the European Repo Market Conference, London, 11 June 2013).

Policy makers rightly use various channels to help them understand how products/financial markets function. Immediately after the Lehman default, market participants themselves were often kept out of the relevant discussions – recall Commissioner Barnier instructing his department to halt visitors from the banking world. Instead, too much importance was attached not only by policy makers but also by central bankers to academic research. Granted, such research is important in the right proportion, but should always be taken with a pinch of salt. Any findings need to be carefully checked for accuracy and complemented by insights from market practitioners. The picture painted by Gorton and Metrick, in their widely quoted paper, that the expansion of repo drove the large “shadow-banking” system and the subsequent run on repo caused its collapse, was clearly misleading.

At the same time the lack of data is blamed for the lack of information that could have warned policy makers a crisis was in the making.

The first ICMA ERCC repo market survey was compiled 17 years ago, and this survey is now widely distributed and clearly shows market trends. Immediately after the Lehman event the value of outstanding repo dropped considerably. As repo is a very short term but important financing tool, banks (the sell side) reacted immediately and reduced outstandings with all counterparties. The subsequent roll-out of various regulatory and prudential rules forced banks to look at the size of their balance sheets and profitability in the light of events, and to make adjustments throughout their franchise. Of course there have been mistakes, but the repo market never stopped functioning. How else would the central bank community have been able to inject massive liquidity following the financial crisis and even more after the sovereign debt crisis? The latest survey shows a recovery, with even bigger outstandings than before. Does that mean we are back to square one? Not at all, repo is there to serve the real economy, and is part of the Pittsburgh agreement (even if it is not explicitly mentioned), and part of the enhanced stability of financial markets.

Gradually re-pricing happened as LR, LCR, NSFR, Basel III, CRD IV, CRR II, MiFID II, EMIR, among others, started to bite. At that point the true value of repo became apparent, in particular as the year-ends of 2016 and 2017 clearly showed the pain points: ie the real economy (insurance, pension funds, asset managers) being unable to raise adequate short term liquidity. It became clear that a fresh look at the tsunami of regulatory changes was needed.

The shift toward real economy financing as it is envisaged by the Capital Markets Union project, the implementation in the EU of EMIR, Basel III, MiFID II, CSDR, and others can only prove robust if supported by a sufficiently fluid collateral market. Having the right collateral in the right place at the

right time and of the right quality depends on collateral movements through the secured financing market. The push by the authorities towards centralised clearing and bilateral margining has created huge collateral demands. The sell side has already adopted this mandatory obligation while the buy side is slowly coming on board, with the final deadline in 2020. The electronification of the repo market continues with new initiatives being launched, widening its appeal to both sell and buy side supported by FinTech solutions. A new repo world is emerging which is, more than ever before, at the service of the real economy. The central bank community was absolutely right to choose repo as the instrument for central bank financing of the real economy, using the banking system as the go-between.

The last piece of the puzzle is now being prepared, SFTR, although somewhat over-engineered, with 150+ fields to be reported. The ICMA ERCC survey has already shown the benefits of gathering data, and we are obviously supportive of providing more transparency. Added transparency for use by the regulatory community is clearly needed, but to avoid yet another financial crisis we need to combine data in the right proportion with market intelligence. Taken on their own, the SFTR’s 150+ fields are not going to tell a new repo story, or disclose issues that have not been visible before. But when combining this data with information obtained through MiFID II/R, EMIR and the emerging Post Trade Risk Reduction Services we should be on the right track.

Repo/collateral markets are crucial, providing unprecedented protection in what remains a global financial market which is experiencing unprecedented innovation. The new regulatory and prudential framework is built around collateral. Collateral is the new cash. Welcome to the new world.


Godfried De Vidts is Chairman of the ICMA European Repo and Collateral Council and Committee.