Collateral is king for euro repo market functioning, says BIS
11 September 2019 Brussels
Image: Shutterstock
The EU repo market is increasingly driven by investors in search of specific collateral rather than investors just funding, according to the Bank for International Settlements鈥� (BIS) December quarterly review.
This trend has strengthened segmentation along collateral lines and has gained force from the European Central Bank鈥檚 purchases of government bonds as it seeks to provide additional monetary stimulus.
In its report, BIS explained that the repo market is a major channel for circulating cash and collateral through the financial system, and the euro repo market is a key channel for redistributing liquidity between financial institutions.
BIS鈥� new report found that the market shows signs of persistent segmentation according to the 鈥榟ome country鈥� of the collateral.
Consistent with segmentation, individual participants have 鈥減referred habitats鈥�, in the sense of systematically borrowing and lending against collateral of a given country, BIS highlighted in its review.
While this shift has had no significant impact on the market鈥檚 overall functioning, it has affected that of individual segments, BIS observed.
鈥淚t remains unclear whether the importance of collateral demand is reshaping the repo market鈥檚 dynamics is a permanent shift or only a consequence of the central bank鈥檚 balance sheet expansion, as it simultaneously increased funding liquidity and removed collateral through securities purchases,鈥� BIS concluded. 鈥淚n either case, these efforts have amplified the trend towards market segmentation.鈥�
This trend has strengthened segmentation along collateral lines and has gained force from the European Central Bank鈥檚 purchases of government bonds as it seeks to provide additional monetary stimulus.
In its report, BIS explained that the repo market is a major channel for circulating cash and collateral through the financial system, and the euro repo market is a key channel for redistributing liquidity between financial institutions.
BIS鈥� new report found that the market shows signs of persistent segmentation according to the 鈥榟ome country鈥� of the collateral.
Consistent with segmentation, individual participants have 鈥減referred habitats鈥�, in the sense of systematically borrowing and lending against collateral of a given country, BIS highlighted in its review.
While this shift has had no significant impact on the market鈥檚 overall functioning, it has affected that of individual segments, BIS observed.
鈥淚t remains unclear whether the importance of collateral demand is reshaping the repo market鈥檚 dynamics is a permanent shift or only a consequence of the central bank鈥檚 balance sheet expansion, as it simultaneously increased funding liquidity and removed collateral through securities purchases,鈥� BIS concluded. 鈥淚n either case, these efforts have amplified the trend towards market segmentation.鈥�
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