ICMA ERCC: 2018 saw noticeable spike in settlement fails
16 January 2019 London
Image: Shutterstock
The end of last year saw a spike in settlement fails for securities settling on European central security depositories, according to the International Capital Market Association鈥檚 (ICMA) European Repo and Collateral Council (ERCC).
However, the ERCC said: 鈥淚t is difficult to discern the extent to which this [spike in settlement fails] is caused by genuine unavailability of collateral and how much is the result of a very low-interest-rate environment.鈥�
Compared with the previous two year-ends, 2018 was relatively uneventful, the ERCC added.
It stated: 鈥淐ore Euro general collateral (GC) and specials did come at a premium leading up to the turn but then cheapened significantly into year-end itself. Meanwhile, non-core general collateral saw scarcely an impact, with only some specials becoming difficult to find.鈥�
Elsewhere, the council found that the US Treasury repo market 鈥渨as the real surprise, with an unexpected scramble for cash sending rates notably higher鈥�.
It added: 鈥淲hile the markets, for the most part, were fairly orderly, it is clear that a number of year-end pressures and risks persist.鈥�
ERCC found banks still face pressures to reduce balance sheets, while positioning is also an 鈥渆xacerbating factor鈥�, both in terms of collateral and foreign exchange which is highlighted by the spike in US dollar rates.
Reflecting on the last couple of years, the ERCC affirmed: 鈥淪ince 2016 it would seem as if the market has become more aware of these risks and better prepared in terms of managing its year-end financing and collateral requirements.鈥�
鈥淟ocking-in funding early, however, comes at a premium. But, while the extreme levels and dislocations of the 2016 turn have not been repeated since, there is still plenty of quantitative and qualitative evidence to suggest that year-end pressures persist and that access to repo and lending markets for many firms is impaired.鈥�
The ERCC concluded: 鈥淎s the US repo rate spike reminds us, the problems flagged by the 2016 turn have not necessarily gone away, they just manifest themselves in not entirely predictable ways.鈥�
However, the ERCC said: 鈥淚t is difficult to discern the extent to which this [spike in settlement fails] is caused by genuine unavailability of collateral and how much is the result of a very low-interest-rate environment.鈥�
Compared with the previous two year-ends, 2018 was relatively uneventful, the ERCC added.
It stated: 鈥淐ore Euro general collateral (GC) and specials did come at a premium leading up to the turn but then cheapened significantly into year-end itself. Meanwhile, non-core general collateral saw scarcely an impact, with only some specials becoming difficult to find.鈥�
Elsewhere, the council found that the US Treasury repo market 鈥渨as the real surprise, with an unexpected scramble for cash sending rates notably higher鈥�.
It added: 鈥淲hile the markets, for the most part, were fairly orderly, it is clear that a number of year-end pressures and risks persist.鈥�
ERCC found banks still face pressures to reduce balance sheets, while positioning is also an 鈥渆xacerbating factor鈥�, both in terms of collateral and foreign exchange which is highlighted by the spike in US dollar rates.
Reflecting on the last couple of years, the ERCC affirmed: 鈥淪ince 2016 it would seem as if the market has become more aware of these risks and better prepared in terms of managing its year-end financing and collateral requirements.鈥�
鈥淟ocking-in funding early, however, comes at a premium. But, while the extreme levels and dislocations of the 2016 turn have not been repeated since, there is still plenty of quantitative and qualitative evidence to suggest that year-end pressures persist and that access to repo and lending markets for many firms is impaired.鈥�
The ERCC concluded: 鈥淎s the US repo rate spike reminds us, the problems flagged by the 2016 turn have not necessarily gone away, they just manifest themselves in not entirely predictable ways.鈥�
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