Halister News

(Bloomberg) -- Any changes to the ECB’s securities lending facility may be more likely to improve bond market liquidity than shortages in the repo market unless there are adjustments to the collateral rules.

• ECB facilitating bond lending “gives primary dealers more confidence in taking a short position in the market so others can more easily take short positions,” says Rabobank strategist Lyn Graham-Taylor
  • “In theory liquidity should improve”
• Currently the ECB lends securities at a fixed fee of 30bps, or the market rate, whichever is higher
  • Subject to availability, each counterparty may borrow up to 2.5% of the amount outstanding of a single issue, with a maximum of EU200m for any such issue
  • These are the two current parameters which could be relaxed; bund futures dropped sharply on reports that the ECB would lend out more bonds to avert market freeze
• While the initial reaction may be on the margin negative to bunds, as support from repo is reduced, this does not constitute a material policy change, Graham-Taylor says
  • ECB’s current securities facility is a bond-for-bond transaction so unless “they open up collateral, it wouldn’t change anything” in the repo market
  • Other impediment is each national central bank controls its own securities lending facility so “the Bundesbank can ultimately decide not to change anything”
  • “Whether they accept any other assets, or cash, changes the game”
  • NOTE: Euro-area repo rates trading below ECB’s -40bp deposit rate, as well as Eonia