Download Minutes of the SLRC meeting

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.