23 June 2017
Reporter: Drew Nicol
ICMA: NSFR will make EU repo less attractive
The International Capital Market Association (ICMA) has warned that the mandatory buy-in regime of the European Central Securities Depositories Regulation (CSDR) will be a significant deterrent to lenders of corporate bonds in the repo space.

In its latest study on the health of European corporate bond repo and securities lending market, the association reiterated its concerns that crippling regulation was the biggest risk to future of the EU repo market.

“[CSDR] will have a material impact on overall supply, particularly with respect to lower credit or less liquid corporate bonds,” explained ICMA in its report.

Along with CSDR, ICMA highlighted that the net stable funding ratio, which was introduced as part of a bundle of new requirements for banks under the Basel III framework, will also increase trading costs and limit the capacity of banks to fulfil the critical role of repo market intermediation.

According to ICMA, there is scope for creating efficiencies through automating many of the highly manual and labour-intensive processes of the market.

“However, automating the credit repo market is not straightforward, given the intricacies and nuances of the market, with the market becoming even more complex and fragmented with every new layer of regulation.”

ICMA first raised its concerns regarding the negative affect incoming regulation was having on the repo market in its quarterly market reviews, where it highlighted to huge strains that were placed on the market at year-end 2016, and reoccur at every quarter end.

Beyond regulatory concerns, ICMA said that, for the most part, supply into the European credit repo market is relatively good, particularly with respect to investment grade corporates. And while repo rates for specials, particularly in the high yield space, can be expensive and volatile, there is usually still availability.

However, the changing nature of the underlying market, with a trend toward smaller trade sizes and more rapid turn-over of dealer positions, which is making sourcing supply more difficult. While there may be plenty of bonds in the lending programmes, there is little or no economic incentive to lend small sizes for very short-periods.

The study was a joint initiative between the ICMA European Repo and Collateral Committee and the ICMA Secondary Market Practices Committee.

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The association also point to increased automation of highly manual and labour-intensive processes of the market as a way to mitigate rising costs and create efficiencies
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