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26 September 2011

FT: Italy's haircut reprieve looks temporary


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The margins required on French and Italian bonds were raised two weeks ago by LCH.Clearnet, which meant lenders would receive less cash when using those bonds as security for repo funding.


Analysts have suggested that a separation of French and Italian paper within LCH.Clearnet’s collateral categories has become inevitable. That would pave the way for the company to increase haircuts on Italian bonds by as much as 5 per cent in line with the recent increase for Spanish debt. Last week the clearing house retracted the planned margin hikes on French and Italian paper just days after its first announcement, while saying it would manage Italian bonds on a slightly different basis.

Repo transactions have grown in importance for Europe’s troubled banks as the market for unsecured funding – or funds not backed by specific collateral – has struggled. Société Générale said this month it had €6 billion worth of outstanding repo transactions to help make up for a drop in dollar funding. “While these numbers are small, the lost funding becomes a bigger problem if these haircut increases are repeated”, the analysts said.

LCH.Clearnet’s margin requirements on Spanish bonds have increased twice in the past three months. “LCH.Clearnet applied a more pragmatic treatment of its margin requirements to triple A-rated France than for Italy”, the company said in a statement, adding that it would “continue to monitor the level of margin that is appropriate for Italy as it does for all sovereign debt”.

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© Financial Times


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