Wednesday 23rd April 2014
flextrade
The National Bank of Abu Dhabi (NBAD) has become the first licensed market-maker in the United Arab Emirates after winning approval from the Securities and Commodities Authority (SCA) - BlackRock has been awarded its first Renminbi Qualified Foreign Institutional Investor (RQFII) licence by the China Securities Regulatory Commission (CSRC) - An index joint venture between FTSE Group and Canada’s TMX Group has acquired the indices business of MTS, a European electronic fixed income trading business owned by the London Stock Exchange - The European leveraged finance market is set to undergo a shift this year, as private equity sponsors veer back towards loans to finance leveraged buyouts, says S&P Capital IQ - Turkish corporates are the most exposed among EMEA emerging markets to a scenario of slowing growth, rising interest rates and a persistently weak local currency, according to Fitch Ratings - London-based Global Markets Exchange Group (GMEX) is in talks to acquire an equity stake in ALTX Africa Group, a new exchange operator focusing on East Africa - Alternative asset managers with expertise in high-yield fixed income and distressed assets are upping their investments in the peer-to-peer loan market, according to a new report from Cerulli Associates.

New ICMA European Repo Council paper examines role of ‘haircuts’

Wednesday, 08 February 2012
New ICMA European Repo Council paper examines role of ‘haircuts’ ICMA’s European Repo Council (ERC) has published a paper entitled: Haircuts and initial margins in the repo market, which calls for more detailed understanding of the precise impact of collateral haircuts in the repo market to inform the regulatory debate.The paper, written by Richard Comotto of the ICMA Centre, questions the popular view of the role played by collateral haircuts in the recent crisis.http://www.ftseglobalmarkets.com/

ICMA’s European Repo Council (ERC) has published a paper entitled: Haircuts and initial margins in the repo market, which calls for more detailed understanding of the precise impact of collateral haircuts in the repo market to inform the regulatory debate.The paper, written by Richard Comotto of the ICMA Centre, questions the popular view of the role played by collateral haircuts in the recent crisis.

A haircut is a percentage discount deducted from the market value of a security that is being offered as collateral in a repo in order to calculate its purchase price. The adjustment is intended to take account of the unexpected losses that one party to the repo trade might face in buying (or selling) the security if the other party defaults.

Regulators are concerned that the application of haircuts could amplify negative market trends. They worry that, in a situation when asset prices are falling, increases in haircuts in response to a loss of confidence could reduce liquidity of market users who may then sell assets, so reducing the price and causing haircuts to be increased again. This theoretical scenario has been blamed by some for exacerbating the market crisis.

The paper refutes this view, citing evidence, much of it from official sources, that haircuts did not in fact change much during 2007-2009. Rather market issuers initially responded to the crisis by reducing or withdrawing credit lines, shortening the terms for which they were willing to lend and narrowing the range of collateral they were willing to accept.

The author examines the data on which academic studies of this phenomenon have been based and finds that these have been largely focused on the use of structured credit as collateral in the US market. This has been extrapolated to the wider global market without adequate consideration of the differences in market structure. The paper concludes that there is no empirical evidence to suggest that the imposition of haircuts in Europe was a major contributor to the market crisis.

 “Repo market participants want to work with the authorities to ensure the operation of the market in Europe is well understood, so that regulatory proposals assist its efficient functioning. Industry efforts have always and continue to be directed at improving market practice and education,” says Godfried De Vidts, chair of the ERC.

Related News

Related Articles

Related Videos