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20 April 2015

Reuters: ECB risks freezing repo market, ICMA official says

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The ECB risks secured-lending or repo markets grinding to a halt unless it works more closely with national central banks to improve liquidity, a senior trade association official told Reuters.

The 5.5 trillion euro ($6 trillion) repo market is vital for banks and companies to manage their cash balances, offering short-term loans in exchange for government debt as collateral.

Godfried de Vidts, the chair of the International Capital Market Association's European Repo Committee, said unless the ECB took action within the next few months, investors might start avoiding eurozone bonds. "Investors could become reluctant to invest in eurozone debt", he said, noting that his committee had voiced its concerns to officials at the ECB.

The ECB has allowed bonds bought under its trillion-euro purchase scheme (QE) to be used as security for loans, a precaution against any surge in repo prices that might occur as QE sucks securities out of the market. But traders say that the system does not allow bonds to be leased for long enough, is too restrictive on the amount parties can borrow and is very expensive.

De Vidts said the ECB's "securities lending" framework also relies too heavily on NCBs offering their own lending programs, and many of them have not yet put systems in place.

NCBs are responsible for 80 per cent of purchases under QE, with the ECB directly buying the remaining 20 percent in the roughly 7-trillion-euro eurozone government bond market.

Last week, ECB President Mario Draghi said the bank saw no evidence QE was creating a shortage of bonds, or that this might happen in the future.

Full article

© Reuters

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