Title slide

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