Saturday, May 5, 2012

Vice President of ECB calls for a real-time centralized database with all repo market activity

In his speech, towards better regulation of the shadow banking system, ECB Vice President Vitor Constâncio calls for a real-time centralized database with detailed information on all repo market activity.

Readers will immediately realize that this database is a subset of the 'Mother of all financial databases' made possible by the ultra transparency your humble blogger has been advocating.

For example, ultra transparency includes banks reporting on an on-going basis their current asset, liability and off-balance sheet exposure details.  Naturally, repos are a liability that would be reported.

This is the second time, after the ABS data warehouse, that the ECB has effectively endorsed my proposal for ultra transparency and the 'Mother of all financial databases'.

As I previously discussed for the ABS data warehouse, the information that the ECB would like is readily available at very low cost from the financial institutions' information systems.  These systems, which are very large databases, are designed to capture each repo transaction as it occurs -- an observable event.

Therefore, these systems are capable of reporting after the close of business any changes (including maturity of old repo and new repo entered in to) that have occurred on that business day in the financial institutions' repo exposures.

Please notice the benefits of this database.

IV. How to enhance the monitoring of repo and securities financing markets 
I would like now to focus on enhancing the monitoring of the repo markets. This market is largely an OTC market where rates and volumes are difficult to observe in real time with the implication that there is no comprehensive source of information in Europe. 
There are some important trading platforms where operations of short-term and more standard maturity take place, which can provide us some useful information. However, significant limitations or shortfalls do exist as regards existing data sets. 
First, market data are not timely and hardly comparable
The ICMA survey is conducted every 6 months, the ECB Money Market Survey every year and the ECB Money Market Study biannually. Timelier sources of data are available among others from CCPs or from trading platforms e.g. Eurex Repo Euro Market, ICAP BrokerTec or MTS. As regards the ECB Money Market survey, there will be a pilot phase with a limited panel of banks to have a quarterly review. However, most data refers mostly or exclusively to the interbank market. 
Second, there are significant limitations as regards data stemming from market infrastructures.  
Data are fragmented and not complete, and are also not easily retrievable for analytical purposes [5]
Finally, there are no statistical sources available as regards the repo and securities financing markets. 
One recent initiative will be of some help, notably the global initiative coordinated by the Committee on the Global Financial System (CGFS) and by the ECB, together with other central banks of the Eurosystem, which plans to launch a qualitative quarterly survey on credit terms and conditions in euro-denominated securities financing and over-the-counter (OTC) derivatives markets. 
This survey is driven in particular by a need to monitor developments in securities financing, i.e. lending collateralised by securities, and OTC derivatives markets, as well as in shadow banking more generally
The survey will provide information about changes in credit terms applied by the largest banks for lending against euro-denominated security collateral and for OTC derivatives transactions with key counterparty types, as well as about main reasons behind the changes in those terms. This makes it a valuable monitoring and potentially early warning tool to support risk surveillance work and the risk identification process. 
V. Proposal for a database on the euro repo market 
The ECB has a keen interest in obtaining detailed information on repo market activity both for monetary policy implementation and financial stability considerations
Any financial transaction that significantly affects the functioning of money markets is relevant for the transmission mechanism of monetary policy as well as for the operational framework of monetary policy implementation. The continuous gain in importance of the repo market is consequently of great importance for the Eurosystem. 
An assessment of financial intermediaries’ funding environment and financing activities is also a key element of any financial stability analysis. The monitoring of underlying developments on the basis of a regular data collection would benefit the ECB’s tasks in pointing to potential risks stemming from this market....
A major benefit of ultra transparency and the creation of the 'Mother of all financial databases'.
So how to improve the data availability to monitor the repo market? 
Ideally, a central database would serve the purpose.... 
In the case of repos, however, it has to be considered that transactions are to a large extent already channelled to formal infrastructures for clearing and settlement purposes. 
For instance, Central Securities Depositories (CSDs) already centralise in their systems, for their respective market, information relating to repo that can be derived from the settlement instructions. It could be argued that they de facto perform already a function that is similar to that of a trade repository. CCPs, triparty agents and custodian banks for the bilateral segment are in a similar position with respect to repos of their participants, or customers. 
A central database fed by infrastructures and custodian banks to the extent that they internalise repo settlement in their own books, would be the place for the much needed central view on repo market and its participants, both banks and non-banks
This solution would have to be investigated from a technical point of view....
As discussed above, this is a database that can easily be built.
Therefore, I propose the creation of a EU Central Database on Euro Repos as a joint effort by public authorities and the financial industry... Due to its role in macro-prudential financial stability and the closeness of repo to monetary policy, and as it is the case with the Federal Reserve, the ECB would be well placed to centralise the data gathering for the euro repo market....
The market would also benefit from this solution: reporting infrastructures would have to set-up procedure to retrieve and transmit the data, but they may offer an additional service to their participants given the economic value of information. 
Ultimately, not only authorities, but market participants and the financial markets more widely would benefit from the general increased transparency on the euro repo market.
Exactly the argument that your humble blogger has been making not just about repos and ABS, but across all the opaque areas of the financial system.

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