Vítor Constâncio: Repo market and securities lending - towards an EU
database
Introductory remarks by Mr Vítor Constâncio, Vice-President of the European Central Bank,
to the ECB workshop "Repo market and securities lending - towards an EU database",
Frankfurt am Main, 3 December 2012.
* * *
Ladies and Gentlemen.
I am pleased to welcome you all to this workshop. Your presence today makes clear the wide
interest and also the urgency to enhance the monitoring of the EU repo market. I want
particularly to highlight the participation of the US authorities that kindly accepted to share
their experience, the Bank of England, with whom we share the same transparency
concerns, and last but not least the European Commission and ESMA who have their special
say on the subject of regulatory reporting and trade repositories regulation.
For years before the crisis, repos provided a stable and liquid market. Since the start of the
euro, the euro repo market proved to be very successful. In the past years secured lending
via repos has increased significantly, and, according to our estimate, since 2002 its daily
turnover more than doubled. This increased importance of the repo market particularly since
the onset of the financial crisis stems, of course, with the market perception of credit risk
concerns linked to unsecured transactions. The growth in this market was also underpinned
and promoted by key legislative changes such as those brought by the Collateral Directive,
which provided for a clear and harmonised framework across the EU.
Yet, in 2008, following deterioration in market confidence, financial integration in money
markets deteriorated, as witnessed in an upward drift in cross country dispersion for
overnight rates and a significant decline in interbank market activity, particularly in the
unsecured segment. Some leading commentators (Gorton and Metrick1) even argued that
the core problem of the financial crisis in the US was a run on repos. As a result of the
combined effect of the measures implemented by the ECB, the euro money market
conditions improved during 2012, although its fragmentation remains still high.
Against this background, a key lesson from the crisis is that we need to better understand
and monitor the repo as well as the securities lending markets, given their importance for the
efficient functioning of the financial system. This has been confirmed by the analysis
conducted at global level by the Financial Stability Board (FSB). Also our US friends are
conducting initiatives aimed at the same objective.
The workshop today gathers together key representatives from public authorities, regulators
and market representatives with the aim to achieve a common understanding of the following
key issues: first, what are the expected benefits from requiring additional and more granular
data for monitoring repo and securities lending markets and which data is essential to make
such a data collection effort useful for all relevant stakeholders? Second, how could these
data be better collected, to inform the public authorities assessment about firm-level and
systemic risks?
As to the first question, addressing the lack of transparency is as a matter of fact of primary
importance as it paves the way for tackling six other key issues identified by the FSB related
to securities financing markets, namely the pro-cyclicality of system leverage and
interconnectedness, potential financial stability issues associated with collateral re-use,
potential risks arising from the fire-sale of collateral assets, the potential risks arising from
agent lender practices, securities lending cash collateral reinvestment and insufficient rigour
in collateral valuation and management practices.
Increased transparency can help regulators or supervisors on the one hand as well as
market participants themselves on the other hand.
For regulators a more detailed information set provides insights that may help them to
identify trends in the build-up of risks over time, either for a specific institution, a specific
asset class, or for the market overall. Information availability furthermore allows regulators to
monitor changes in market activity that can lead to the emergence of potential new risks.
Finally enhanced transparency can support the development of appropriate policy responses
in times of stress.
Improved transparency can help as well as it allows participants to
market participants
observe how market activity is evolving over time with respect to pricing, liquidity and other
characteristics that affect their own risk management and profitability. It additionally can
provide information regarding risks that could impact market participants.
Increased transparency might also benefit central banks in the implementation of its
monetary policy operations. More specifically, it can provide information on structural aspects
of the repo market regarding asset categories eligible for monetary policy operations and the
extent of their use by counterparties as well as information on risk control measures applied.
Such information could guide Eurosystem policy decisions (in particular in times of financial
stress) with respect to the Eurosystem's own collateral eligibility criteria and the calibration of
its risk control framework.
As the work carried out by the FSB has shown, the actual set of information to adequately
gauge systemic and firm-level risks arising from securities financing transactions is as a
matter of fact rather straightforward. Assuming a specific home-currency for the transactions
covered, six transaction specific information items are essential: (1) the counterparty of the
transaction, (2) the principal amount, (3) the interest rate or lending fee, (4) information on
underlying collateral (including type, issuer, maturity, currency and valuation of the
collateral), (5) information on the applied haircut as well as (6) the tenor or maturity of the
transaction. I would add to these also information about re-use of securities.
The workshop today intends to assess the grounds designing an infrastructure and data
collection set-up ensuring confidentiality, efficiency in the data transmission, but also looking
for potential synergies, and ensuring through the publication of different levels of data
aggregation to relevant stakeholders that this exercise can be beneficial to regulators or
supervisors as well as market participants. The involvement of all relevant stakeholders from
the very beginning should allow that synergies can be explored and benefits reaped.
Turning now to the second of my initial questions, how could these data be better
collected?
I have earlier this year, in a Conference organized by the European Commission,2 launched
a proposal to create a EU central Database on repos, as a joint effort by public authorities
and the financial industry. I am counting on this workshop to launch the practical discussion
about the main issues and the challenges to be addressed and, most importantly, the
possible solutions for this proposal to become reality. When I first launched my proposal last
April I noted that due to its role in macro-prudential financial stability and the closeness of
repo to monetary policy, the ECB would be well placed to centralise the data gathering for
the euro repo market. This remains true, but today I would like to emphasise that the ECB
organised this workshop by taking a wider perspective on the subject and acting just a
catalyst. Although the ECB stands ready to provide any assistance that may be required I
think, for instance, that a trade repository, acting as an aggregator of several others, could
ensure the most suitable data coverage, leaving us the flexibility to shape the data
aggregation and analysis in line with our evolving needs . However what is important is
ensuring a timely and detailed, complete central view on the market. In fact, the ECB does
not need to centralise itself the data gathering, provided it has access to all the information it
requires.
Having talked about potential synergies that could be explored I would as a side remark also
like to point to the potential use of a trade repository to establish a new benchmark on
secured financing. The discussions on potential improvements of current unsecured or
secured rates pointed to the need to move to more transactions based figures. A repo trade
repository at first sight looks as a promising candidate for establishing and calculating a new
benchmark for repo rates based on actual transactions.
So I leave it to today's joint discussion among the representatives of the industry and
authorities to debate what could be an optimal solution to achieve the result we need.
Whether we will need an EU central database as opposed to a complete, fully fledged trade
repository as done for other market segments will depend on several factors that you are
going to debate in the course of the day.
In the case of repo, and contrary to other financial market segments, plenty of relevant data
of interest to central banks are already channelled from the trading layer for execution to
various categories of intermediaries, oftentimes via CCPs, to the payment clearing and
settlement systems. One key topic for discussion today is thus how to ensure this set of
highly critical but dispersed data can be adjusted, formatted, complemented if necessary,
and channelled, to form the much needed central view on the market.
It will be indispensable today to identify practical solutions on how information can effectively
and efficiently be retrieved and fed to a database, by whom, and to whom, under what
governance and technical channels, and what shall be the indispensable confidentiality
requirements to ensure an appropriate level of data disclosure taking into account the needs
of authorities and different stakeholders. While I say "practical" issues, I am aware that they
entail sensitive policy discussions and choices to be made that may affect market
participants in various ways, not least in terms of costs.
In the light of the way ahead that will emerge from the discussion today, authorities will have
the possibility to draw some final conclusions, including on how in their specific roles they
can and may wish to further support this initiative.
Because market interconnectedness knows no borders, a global alignment in terms of repo
market transparency is desirable (in results, not necessarily in solutions). On this side of the
Atlantic, undoubtedly, I think we should aim for an EU and not only a euro-area central view
on the euro repo market and securities lending data.
To conclude, let me say clearly that in this discussion, the ECB is today acting as a catalyst
for change, to help setting out arrangements needed for financial stability monitoring, thus
ensuring the efficient functioning of financial markets. I see this workshop and the follow-up I
expect from it, as indispensable first steps, leading to a more structured project, involving a
wider set of stakeholders and market participants.
I hope that the exchange of views today will prove fruitful to our common endeavour.
Thank you for your attention.