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Central Bank Seminar, 4 July 2019
María Encío DG-Market Operations Division Money Market and Liquidity Main features of the euro money market Money market trends as observed through MMSR data
1 Main trends in euro money market: MMSR data coverage
Overview
2
Money Market segments:
A.Unsecured B.Repo C.Foreign exchange swap D.Euro OIS curve
3 From EONIA to the new €STR rate
4 Key findings and conclusions
1. Enhanced Euro Money Market Study 2018 Changes compared to earlier editions
• Last published in 2015
• Sample: 149 institutions
• Period covered: 2 years
• Annual survey based data on Q2 volume
• Next to be published in summer 2019
• Sample: 50 largest banks (MMSR reporting
agents)
• Period covered: daily data for 2.5 years
(Jun16- Dec18)
• Real transactions based data on unsecured,
repo, OIS, and FX swap market
Previous EMMS editions Enhanced EMMS 2018
Market Share of the Daily Average Volume per quarter
1. Market profile and trends in the Euro Area Less diversified among segments than 15 years ago,
featuring a strong dominance of secured money market
Sources: ECB – EMMS until 2015, MMSR from mid-2016 onwards Notes: An overlapping sample of 38 banks was used. The data refer to banks and CCPs as counterparties
Index: total volume in 2003Q2 = 100 Y-axis: EUR billions
0
100
200
300
400
500
600
700
800
2003Q2
2005Q2
2007Q2
2009Q2
2011Q2
2013Q2
2015Q2
2016Q4
2017Q2
2017Q4
2018Q2
2018Q4
Unsecured Secured FX swaps OIS
0
100
200
300
400
500
600
2003Q2
2005Q2
2007Q2
2009Q2
2011Q2
2013Q2
2015Q2
2016Q4
2017Q2
2017Q4
2018Q2
2018Q4
Unsecured Secured OIS FX swaps
Turnover in money market segment
Sources: ECB – EMMS until 2015, MMSR from mid-2016 onwards Notes: An overlapping sample of 38 banks was used.
1. ECB Monetary Policy and O/N Money Market interest rates
Y-axis, LHS: percentages, RHS: EUR billion
Source: ECB. Latest observation: 11 June 2019
0
200
400
600
800
1000
1200
1400
1600
1800
2000
-1.00
0.00
1.00
2.00
3.00
4.00
5.00
6.00
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019Excess liquidity [RHS] EONIA MLF DF MRO €STR Start Financial Crisis
1. Developments in money market rates since June 2014
Sources: ECB, BrokerTec, and MTS. Notes: Minimum and maximum money market rates refer to the minimum and maximum of the 30-days moving averages of the following rates: EONIA, T2 rate, GC pooling, GC Italy, GC Germany and Special German repo rate. T2 rate refers to an unsecured O/N rate derived from TARGET 2 payments system data. Latest observation: 23 April 2018.
Y-axis: percentages
-1.5
-1.0
-0.5
0.0
0.5
-1.5
-1.0
-0.5
0.0
0.5
Jun.14 Dec.14 Jun.15 Dec.15 Jun.16 Dec.16 Jun.17 Dec.17
Range of money market rates ECB policy rates
Liquidity flows in the unsecured market (liquidity flow directions, relative volumes and pricing)
2a. Unsecured segment (wholesale) O/N unsecured rates moved below the DFR large inflows from abroad
(i.e. no access to DF and non-operational deposits)
Sources: MMSR data of overnight transactions Notes: The chart considers only deposit taking corporations located in the Euro Area within deposit instruments with fixed rate transactions. In the 2nd chart, trades between a credit institution and a CCP and all trades with positive rate reported by other credit institutions are excluded from the computation of the rate and the share of volumes seeking the representability of the data.
Interbank overnight transactions within the euro area
Sources: MMSR data of overnight transactions Notes: The chart considers only deposit taking corporations located in the Euro Area within deposit instruments with fixed rate transactions. In the 2nd chart, trades between a credit institution and a CCP and all trades with positive rate reported by other credit institutions are excluded from the computation of the rate and the share of volumes seeking the representability of the data.
Out
flow
s
From
EA
to a
broa
d in
flow
s Fr
om a
broa
d to
EA
Y-axis, LHS: percentages, RHS: percentages
0%
20%
40%
60%
80%
100%
-0.50
-0.40
-0.30
-0.20
-0.10
0.00
Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18
% Borrowing
0%
20%
40%
60%
80%
100%
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18
% Lending
% Share above DF % Share below DF VWArate DF rate
Short term repo rate and excess liquidity conditions
2b. Secured (repo) segment Increasing role of the repo as a platform for collateral exchange
Sources: Brokertec, MTS, Bloomberg, MMSR data and ECB calculations
Y-axis: EUR billions Y-axis, LHS: percentages, RHS: EUR billions
Short term repo volume (O/N, S/T, T/N)
Sources: Brokertec, MTS, Bloomberg, MMSR data and ECB calculations
Collateral management driven repo
rate
Cash management driven repo
rate
0
300
600
900
1200
1500
1800
2100
-2.00
-1.50
-1.00
-0.50
0.00
0.50
1.00
1.50
Dec 12 Dec 13 Dec 14 Dec 15 Dec 16 Dec 17 Dec 18Excess Liquidity (RHS) Repo Funds EU repo Index
GC Pooling Referred Index ECB Deposit Facility
0
50
100
150
200
250
300
Dec 10 Dec 11 Dec 12 Dec 13 Dec 14 Dec 15 Dec 16 Dec 17 Dec 18
General Collateral Specific Collateral
Breakdown of secured market turnover by month
2b. Secured (repo) segment … sensitive to balance sheet reporting dates
Sources: MMSR Notes: The bars in red and orange represent the month of December respectively on the borrowing and lending side
Y-axis: EUR trillions Y-axis: EUR trillions
Weighted average 1-day (O/N, S/N, T/N) borrowing rates by location of collateral issuer
Sources: MMSR
0
1
2
3
4
5
6
7
8
Jul 16 Nov 16 Mar 17 Jul 17 Nov 17 Mar 18 Jul 18 Nov 18
Borrowing Lending
-4.0
-3.5
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
Jul-16 Nov-16 Mar-17 Jul-17 Nov-17 Mar-18 Jul-18 Nov-18
%
Belgium France Germany
Italy Netherlands Spain
Non-GC rates for short-term maturities
2c. latest quarter end in repo and forex swaps Orderly QE in June with quick normalisation: Usual decline in core-country and increase in Italian collateral rates in the repo market. Less pre-funding
observed in FX swap market but rates are in line with March QE.
Source: MMSR, Bloomberg, internal calculations
Y-axis: percentages Y-axis: percentages
USD funding implied rates
Source: MMSR, Bloomberg, internal calculations
-0.7
-0.65
-0.6
-0.55
-0.5
-0.45
-0.4
-0.35
-0.3
Aug-2018 Nov-2018 Feb-2019 May-2019
QE IT DE FR ES
• Forward guidance: “The Governing Council now expects the key ECB interest rates to remain at their
present levels at least through the first half of 2020…” [Press release]
• Negative rates: “The Governing Council also assessed that, at this point in time, the positive contribution
of negative interest rates to the accommodative monetary policy stance and to the sustained convergence
of inflation is not undermined by possible side effects on bank-based intermediation. However, we will
continue to monitor carefully the bank-based transmission channel of monetary policy and the case for
mitigating measures.” [Introductory statement]
• In the meeting: “Several members raised the possibility of further rate cuts.
Other members raised the possibility of restarting the asset purchase
programme, or further extensions in the forward guidance.” [Q&A]
• Rate cut: “There is confidence in the present baseline, but also clear
acknowledgement of the risks. The beginning of a granular discussion about
what to do, one of which is exactly cutting interest rates further, if adverse
contingencies were to be realised.” [Q&A]
2d. Press release on 6 June 2019 ‘Still confidence in the baseline, but in the midst of increased and prolonged
uncertainty […] readiness to act in case of adverse contingencies.’ (ECB President)
EONIA 1Y1Y forward swap rate
2d. OIS rate reflects market expectations Dovish comments by Executive Board members led to a decline in euro area
OIS rates. OIS forward curve fully prices 10 bps DFR cut for September 2019 and March 2020.
Source: MMSR, Bloomberg, internal calculations
Y-axis: percentages Y-axis: percentages
1-month OIS forward curve
Source: MMSR, Bloomberg, internal calculations
-0.60
-0.55
-0.50
-0.45
-0.40
-0.35
-0.30
Jul 19 Oct 19 Jan 20 Apr 20 Jul 20 Oct 20 Jan 21 Apr 21 Jul 21 Oct 21
01 Jul 19 24 Jun 19 18 Jun 19 EONIA -10 bps
3. €-STR methodology
EONIA vs. ECB Euro Short term Rate (€STR)
Source: MMSR, Bloomberg, internal calculations Source: MMSR, Bloomberg, internal calculations
EONIA Euro Short-Term rate
EUR EUR
Overnight Overnight
Unsecured Unsecured
Transaction Based Transaction Based
Unstable Panel Stable reporting sample
Interbank Wholesale
Bank lending Bank Borrowing
Published on T Published on T+1
3. €-STR methodology
Main features of the rate
Parameters more detailed in the statement of methodology https://www.ecb.europa.eu/paym/initiatives/interest_rate_benchmarks/shared/pdf/ecb.ESTER_methodology_and_policies.en.pdf
Do you want to know more?
Scope: unsecured overnight deposits to
measure borrowing costs
Calculation: weighted average, trimming 25%
Data sufficiency policy: contingency triggers (20 banks, 75% top 5 banks’
concentration ratio)
Governance and processes: €STR published by 9:00 am Frankfurt time
Publication policy and transparency on errors
Rate published daily from 2 October 2019
Pre-€STR publications since 28 June
3. Rate behaviour
Trimming: outliers filtered out Y-axis: percentages
• Rate reacts to market factors (Excess Liquidity, rate falls at quarter-ends) • While being less vulnerable to outliers • Pre-€STR (post corrections) very similar to €STR (based on 7:00 data)
3. Adoption and transition to €STR
Timeline
https://www.ecb.europa.eu/paym/pdf/cons/euro_risk-free_rates/ecb.eoniatransitionreport201812.en.pdf
Do you want to know more?
Last EONIA current methodology: 30 September 2019!
June 18: statement of methodology
• Methodology, parameters • ECB appointed €STR
administrator • Pre-€STR announced
Sep 18: €STR selected by WG RFR
•€STR will replace EONIA
March 19: ECB releases timeline
•€STR start date: 2 October •EONIA = €STR + spread upon WG RFR recommendation
31 May 19: spread published: 8.5 bps
• WG RFR recommended methodology is confirmed
• ECB calculated and published the spread • EMMI requests authorisation from FSMA
for re-calibrated EONIA
3. The move from EONIA in T to €STR in T+1
Timeline
30 September by 19:00 CET
Last EONIA published under current methodology
1 October: No overnight rate
published
2 October by 9:00 CET €STR based on 1 October
transactions 2 October at or shortly
after 9:15 CET re-calibrated EONIA
• Better ECB understanding of how money markets evolve thanks to the Money market statistical reporting dataset (MMSR): daily data on transactions conducted by the largest banks in the euro money market.
• Role of unsecured interbank market very limited. The bulk of the activity in the unsecured market is outside the interbank sector, concentrated at the overnight tenor with borrowing rates bellow the DFR. Large inflows from abroad.
• Having access (or not) to the deposit facility and regulatory classification of deposits “operational vs. non-operational deposits” have implications for transaction cost and liquidity flow dynamics.
• Repo market continued to gain in importance overtaking by far the unsecured market, as also reflected in increased focus on this market segment by major central banks.
• Overall repo market turnover has increased but divergence observed between cash and collateral driven function in reaction to a high amount of ECB excess liquidity and high demand for HQLA to comply with regulatory requirements triggering sensitivity to balance sheet reporting dates.
• Forward OIS curve fully prices 10 bps DFR cut for September 2019 and a second cut in March 2020.
• Interest rate benchmarks are essential for the smooth functioning of the financial market. The ECB decided to develop a euro short-term rate (€STR) reflecting the wholesale euro unsecured overnight borrowing costs of euro area banks and will complement existing benchmark rates produced by the private sector, serving as a backstop reference rate.
4. Summary of main findings and key messages
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