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BANK OF ENGLAND SECURITIES LENDING AND REPO COMMITTEE (SLRC) 13 December 2016 – Held at Bank of England MINUTES External Attendees Alex Lawton Andy Dyson Andy Krangel Cameron Dunn David Bicarregui David Hiscock Emma Cooper Godfried Devidts Jamie Smith Kabin George Mike Chadwick Mike Manna Nina Moylett Oliver Butcher Olivier Grimonpont Paul Wilson Richard Glen Ronan Rowley Ross Barrett Victoria Webster StateStreet ISLA Citi BAML Goldman Sachs ICMA Blackrock ICAP Lloyds Markit Aviva Barclays Prucap RBS Euroclear JP Morgan Clearstream Deutsche Bank The Investment Association AFME Bank of England Attendees Sarah John Aakash Mankodi Jonathan Pyzer Robert Harris Joseph Noss Richard Gordon Head of Sterling Markets Division (Chair of SLRC) (Secretary of SLRC) Minutes The minutes of the September 2016 SLRC meeting were approved by the Committee and accordingly would be published on the Bank of England’s website. Update on market conditions Over the past quarter, the gilt repo market had traded broadly in line with historical levels, although a concentrated short position in the 2% 2025 gilt had caused this bond to trade special1. In part this reflected the bond’s status as ‘cheapest-to-deliver’ in the long gilt future contract, with implied repo rates trading deeply negative. It was noted that the DMO standing repo facility had been activated numerous times for this bond, releasing some of these pressures. Some members noted a continuation of the somewhat elevated level of ‘technical fails’ within the gilt repo market that was discussed at the Committee’s September 2016 meeting. The Euro area market however was characterised by a shortage of collateral, with pricing dislocations observed across markets, particularly against German government bonds. Recently announced changes to the ECB lending facilities were welcomed by the market, although operational frictions associated with these programmes had made some collateral more difficult to source. Preparations for year-end had begun in November, with a deterioration noted in the availability and cost of funding through term repo markets. In particular it was thought that some larger institutions had increasingly struggled to leverage their relationships with banks to obtain additional balance sheet capacity. Lower interest rate on high-quality, short-dated securities were thought in part to be a by-product of a decrease in repo market liquidity, with market participants looking for alternative investments as a low risk store of value. Trading structures that utilised bank balance sheets most efficiently were continuing to be favoured by banks. In securities lending markets, an increase in ‘peer-to-peer’ activity continued to be a theme. Development of bilateral relationships had so far been predominantly been amongst larger market participants, reflecting the high fixed costs of developing these relationships. 1 A special is an asset that is subject to exceptional specific demand in the repo and cash markets compared with very similar assets. Members raised the Securities Financing Transaction Regulation (SFTR), which was thought to represent an additional cost on market participants and could incentivise some to leave the market. Other themes of interest amongst members included: i) the impact of the extension of RTGS hours, ii) the impact of the Net Stable Funding Ratio (NSFR) and implications for bank balance sheets, and iii) further migration of activity from unsecured to secured money markets. Update on the CGFS workstream on repo markets The Bank updated members on a ‘Committee on the Global Financial System’ (CGFS) workstream. The group were mandated to investigate developments in repo markets internationally and understand the drivers of change, given the importance of those markets for overall market liquidity. The findings of this cross-jurisdiction study of repo markets were expected to be reported in the early part of the German G20 Presidency. Update on Securities Lending, Repo and Money Markets Code of Conduct The Committee was updated on the current progress on the Code. The name of the code had been revised to ‘The UK Money Market Code’. A draft text of the code was shared with members of the Committee, with final comments welcomed ahead of the deadline on the 27 January 2017. A final version would be circulated to members after the Code Sub-Committee had agreed the final text at the start of March. It was scheduled to be published in Q2 2017. Comments were sought from the group on the sections focussed on adherence and fails. Members of the Committee thought that the adherence section should give careful consideration of the Senior Manager’s Regime framework. A question was raised for the Code Sub-Committee as to whether the statement of commitment was time limited and whether it should be re-stated annually. The fails section would be based on principles, with a focus on the principle that no party should gain financially by failing to deliver a security. The Code emphasised that failing a trade was poor market practice SONIA reforms The Bank gave a short presentation setting out the background to the reform of SONIA and proposed methodology and definition for reformed SONIA. The key differences between the reformed SONIA rate and the existing SONIA calculation were outlined to the Committee. The key change to SONIA, set out in an earlier consultation paper in summer 2015, was that it will in future capture a broader range of unsecured overnight deposits, by including bilaterally negotiated transactions alongside brokered transactions. The average daily transaction volume underpinning reformed SONIA was estimated to be £36 billion, around three to four times that for SONIA. One of the key changes being consulted on was the proposed move from a volume weighted average mean to a volume weighted average median. This reflected the Bank’s view that the median produces a rate more consistent with the existing measure of SONIA; is robust to outliers and unrepresentative trades; and is sufficiently insensitive to erroneous or potentially manipulative trades. The proposed reformed SONIA is highly correlated with current SONIA, closely tracking significant movements; it has been on average 1.3 basis points lower than current SONIA. Members discussed an excerpt from the consultation paper suggesting that the Bank could change the SONIA calculation methodology at any time. It was noted by Mr Harris that there were no plans to change the construction of the rate once the methodology was finalised; the process of evolution proposed would only be used if it was not possible to produce a robust benchmark for example following a structural change to the unsecured deposit market. The deadline for responses to the Bank’s consultation on the reform on the Sterling Overnight Index Average (SONIA) was the 31 December 2016. Update on the review of MMLC and SLRC Terms of Reference (ToR) It was noted that there had been unanimous support for the reform of the committees as set out in the September SLRC meeting. In particular a structure comprised of a single committee to focus on strategic issues, with technical sub-committees to focus on more technical issues. A revised ToR for the committee was therefore proposed, with a change in the name of the committee to the ‘Money Markets Committee’. These changes would necessitate a change to the membership of the committees. Individual institutions would be contacted in Q1 2017 to discuss these membership changes. Update on ISLA and ERCC work programmes ISLA ISLA shared their observations of trends in the securities lending market. ISLA were working closely with ESMA on SFTR reporting requirements. This work was due to conclude in the first half of 2017. Work was also progressing on single counterparty concentration limits that formed part of the Basel III framework. Recognising increased interest from market practitioners, ISLA was working on developing legal documentation to support a ‘pledge’ structure of trading. ERCC Main areas of focus included: i) leverage and liquidity rules, ii) SFTR, iii) the harmonisation of collateral management principles, iv) work contributing to the CCP recovery and resolution framework, and v) the interpretation of best execution under MiFid II in the securities financing markets.