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principles of liquidity and systemic order. This was the case banks to borrow euro liquidity against eligible collateral funding markets. This can be in conjunction with their
with the FIMA Repo facility previously mentioned. and has been subscribed to by six institutions with >€10bn proprietary repo operations or on a fully outsourced
Eurosystem securities lending facilities serve in approved lines to date. During periods of heightened basis. Agency repo solutions can be reinforced with
as an effective backstop, supporting bond In the Eurozone, the ECB unveiled a series of monetary disruption to Euro liquidity, we may expect to witness balance sheet backed commitments to immunise against
and repo market liquidity without unduly policy responses in March including an increase in the short-term displacement of eligible collateral from third potential liquidity disruption caused by reduced bank
curtailing normal repo market activity. existing APP⁴, the establishment of the €750bn Pandemic party securities lending programmes into this facility if intermediation in repo markets over key accounting dates
Source: ECB Emergency Purchase Programme (PEPP) and the initiation the underlying members are required to provide liquidity or other periods of heightened market stress.
of purchases of Greek sovereign debt under this facility⁵. support their local banking sector.
by implementing the FIMA Repo facility enabling qualifying These facilities are designed restore the orderly functioning Since the 2008 global financial crisis, we have witnessed
institutions to temporarily exchange their US Treasury of euro area financial markets, following the extraordinary Pension Funds are a key beneficial owner constituency a series of lesser volatility events that nonetheless
securities held with the Fed for US dollars, commenting volatility, fast de-risking and thin liquidity conditions during for our industry given their traditional Government focused minds on the associated liquidity and funding
that “this facility should help support the smooth March as well as to ensure that accommodative monetary bond allocation, liability characteristics, regulatory challenges. Examples include the European Debt Crisis,
functioning of the US Treasury market by providing an policy continued to be transmitted to all parts of the single profile and stable record of participation through market Brexit referendum, equity sell off 5th February 2018 and
alternative temporary source of US dollars other than sales currency area. cycles. Illustrating this is the fact that they command now covid-19. Updates in regulation as well as monetary
of securities in the open market³”. over a quarter of total industry lendables and a third of and fiscal policy intervention have been successful in
Importantly the ECB extended the securities lending outstanding loan balances. Liquidity is a cornerstone of addressing the liquidity challenges presented by each of
There was evidence of significant portfolio rebalancing framework that supplements the operations of longer pension fund operations. The volatility in market valuations these events. However, institutional investors remain
by sovereign investors as they responded to the impact standing APP facilities, to include the newly initiated during March and April translated into a dramatic increase conscious that future catalysts for market volatility –
of market volatility in equity and fixed income markets PEPP. This ensures that the Eurosystem securities lending in the requirement to access cash to meet the margin originating from populism movements, geopolitical
in H1 2020. This valuation volatility initially meant that facilities continue to serve as an effective backstop, calls on the derivatives overlay and foreign-exchange tensions, environmental events or cybersecurity threats
they found themselves overweight their permitted fixed supporting bond and repo market liquidity without unduly hedges that are integral to the functioning of pension – will emerge with increased frequency and perhaps greater
income allocations and underweight in terms of their curtailing normal repo market activity⁶. funds. As one of Europe’s largest pension funds stated in a impact than those we have witnessed during the first
target equity benchmark allocation. Investors elected recent roundtable, in 2020 “for the first time I’ve put on a two decades of this century. The events of 2020 illustrate
to shorten the tenor of fixed income lending to ensure The PEPP was additionally recalibrated during 2020 to a financing trade so that I’m taking in cash collateral for one that securities lending and repo are key workers in
there was availability to meet the portfolio liquidations current aggregate facility of €1.85tn with net purchases of my funds who is looking for funding. Incremental income accommodating and facilitating market order and liquidity
required to re-establish equilibrium versus their target being undertaken until at least March 2022⁷. is important, but being able to help your clients when they in response to such challenges.
allocations. With the improvement in equity valuations need funding or hedging, is even more important than
from Q2 onwards there was a subsequent reversal of the In November, the Eurosystem further adjusted the pricing giving them some incremental income.”
earlier rebalancing as funds sought to reduce the excess principles on the APP, PSPP and PEPP facilities to reflect
allocation to this asset class relative to their strategic the changes in euro area repo market conditions since During March and April, there was ansiderable increase in
benchmarks. Whilst the short-term liquidity required to December 2016 and to ensure the continued effectiveness volume and depth of inquiries around how to harness cash Maurice Leo
support such rebalancing has some adverse impact on of the Eurosystem securities lending facilities. [6] Indeed, collateral raised within securities lending programmes to Director
the ability of securities lending programmes to capture the beneficial influence of these adjustments was meet the demand for margin calls in unrelated products – a Agency Securities Lending
the term premium associated with portfolio stability, the acknowledged by the ICMA European Repo and Collateral solution we refer to as “Agency Repo”. Deutsche Bank
industry readily accommodated the core rebalancing Council in its analysis on the performance of the European
activity during the above period. repo market at year-end 2020⁸. In response to the heightened volatility experienced in Maurice is a member of the Agency Securities
2020, Pension funds have increased their cash buffers, and Lending business origination and relationship
Central Banks were probably the busiest market As a precautionary backstop to address pandemic-related notably across different currencies, to ensure they have management team for the EMEA region. He
protagonists in 2020. The measures they implemented euro liquidity needs outside euro area, the ECB also ready access to liquidity and to avoid being forced sellers has twenty years’ experience in relationship
to mitigate the negative economic effects of the implemented the Eurosystem repo facility for central banks in strained equity or private markets in particular. management, origination and product development
pandemic were on a scale and timeline without precedent. (EUREP) in June 2020⁹. This enables non-euro area central remits at custodian and non-custodian lending
Underpinning a number of these programmes were the In conjunction with these adjustments to portfolio providers. He has extensive experience in
structuring securities lending and financing
liquidity, pension funds have been formally evaluating
⁶European Central Bank: Securities lending of holdings under the asset purchase solutions for Asset Managers, Central Banks,
³Federal Reserve announces establishment of a temporary FIMA Repo Facility programme (APP) and pandemic emergency purchase programme (PEPP) agency repo solutions where they use the established Pension Funds, Insurance companies and Sovereign
to help support the smooth functioning of financial markets ⁷European Central Bank monetary policy decisions (December 2020) legal, trading, risk and operations infrastructure of Wealth Funds.
⁴European Central Bank monetary policy decisions (March 2020) ⁸ICMA: The European repo market at 2020 year-end
⁵European Central Bank announces €750 billion Pandemic Emergency Purchase Programme (PEPP) ⁹European Central Bank: New Eurosystem repo facility to provide euro liquidity to non-euro area central banks a securities lending agent to gain access to secured
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