Margins and money markets – oh my! [updated]

Posted by Tracy Alloway on Jun 23 08:40. 1 comment | Share

Meanwhile in Europe … Money markets are also moving.

Recent bidding patterns at the European Central Bank’s seven-day funding operation below:

€102bn on June 8. €136bn on June 15. And a whopping €187bn just on Wednesday. More…

Meanwhile in Europe … Money markets are also moving.

Recent bidding patterns at the European Central Bank’s seven-day funding operation below:

€102bn on June 8. €136bn on June 15. And a whopping €187bn just on Wednesday.

So far, so predictable what with recent eurozone jitters. But some market participants reckon there’s a margins story here too, involving LCH.Clearnet. We know the clearing house has played a big role in weaning European banks off central bank funding in recent months. But perhaps that’s changing.

From Reuters last week:

Clearing house LCH.Clearnet raised the additional margin required on Portuguese and Irish government bonds on Monday after a rise in their 10-year debt yield differentials versus a triple-A benchmark. It raised the additional margin required to 65 percent from 45 percent for long positions on Portuguese government bonds when clearing transactions through its Repoclear service. The equivalent Irish rate increased to 75 percent from 65 percent, LCH.Clearnet said in a statement on its website.

From what we understand, the increase basically means that a Portuguese bond trading at 60 cents on the euro, will receive 21 cents of funding. Before the recent haircut-increase it would have been about 33 cents. So the relatively static margining practices at the ECB might be looking pretty good now.

At the ECB, the haircut for the same (2020) Portuguese bond would be roughly 9 per cent — which means the advance rate would be around 54 cents (or roughly 91 per cent times the 60 cent cash price).

One other explanation we’ve heard is that there’s been a recent lack of euro-denominated cash so that Eonia — the overnight interest rate for loans between Europe’s banks — spiked to 1.33 per cent. With German six-month bills at 1.30-1.32 per cent too, going to the ECB was cheaper at 1.25 per cent.

Those levels have, however, somewhat normalised so it will be super-interesting to see if banks tap the ECB for a smaller or larger amount at next week’s operation.

Update: It’s been pointed out to us by a friendly market particpant that Portuguese government bond repo trading isn’t actually that active on LCH. Clearnet — i.e. the volumes aren’t very big. They reckon the jump in ECB funding might be due to Eonia fixing above the central bank’s refinancing rate, recently. In other words it’s much cheaper for banks to borrow from the ECB than in the interbank market.

BofAML’s Max Leung and Sphia Salim happened to write a bit about this on Thursday:

Since the ECB began unwinding its unconventional measures last year, Eonia has caught the headlines in the rates market every now and then. When Eonia rises significantly above the ECB refi rate, as in recent weeks, the market would question the pace of the ECB’s normalization of liquidity policy, or even postulate that some banks could be in trouble and are scrambling for cash in the market. On the other hand, when Eonia fixes well below the refi rate, it is sometimes also regarded as an indication of market stress, as the low rate is likely caused by heavy borrowings (probably from peripheral banks) from the ECB. In short, as long as Eonia fixings are deemed too high or too low (how high/low depends on the excess liquidity in the system and ‘market perceptions’), they are treated as expressions of concern in the banking system.

It’s like the Goldilocks of money market rates.

And again — all eyes on next week’s ECB operations, say the analysts:

Next Wednesday, when a 3M operation is set to take place, the market could come to realize that the recent increase in demand for ECB funding, and hence excess liquidity, is not temporary. In our view, this operation will not only be used by most banks to rollover their long-term borrowings that mature next week but it will also be considered a timely safety net for many of them, in particular in the periphery. We expect the bid amount to exceed €129bn, i.e., the size of the March 3M operation.

Related links:
Banks rush for ECB cash as Greek tensions swirl – Reuters
The return of the sovereign-bank loop? – FT Alphaville
Mi case es su casa – Spanish clearing and collateral – FT Alphaville

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