Here on FT Alphaville, we’ve often written about the increasing trend towards backing interbank trades with quality collateral.
So far it’s come across as an ad hoc response to post-crisis credit risks, and in Europe especially, the long-term fracturing of eurozone stability into various sovereign risks. Some strange curve pricing here, curious rates divergence there.
Little did we know that there already exists an official collateralised interbank market in Europe. In fact, it’s been there a while.
From a new Bank of Italy financial stability report (emphasis ours):
To foster a recovery in interbank trading activity and to reduce its concentration on very shortterm maturities, in February 2009 e-MID SIM S.p.A., together with the Bank of Italy, created the Collateralized Interbank Market (MIC), an anonymous and guaranteed market for euro-denominated interbank deposits with maturities of one week or longer…
So useful was this experiment that banks ended up creating their own NewMIC before the old one expired at the end of this year.
Clearly it’s popular, and we think we know why:
The value of the securities pledged as collateral by the participants peaked at €20 billion in April; the share of those not eligible for Eurosystem operations but admitted to the MIC gradually declined for almost all the banks, to an average of 5 per cent of the total. For a deposit for the same maturity, the rates on the MIC were generally lower than those on unsecured contracts (Euribor and e-MID) and higher than those on repos (Eurepo), mostly owing to the lower quality of the collateral posted in the MIC.
Hello, two-tiered (three-tiered?) market!
Goodbye, remaining Euribor relevance.
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Futures of the eurozone
Something else of casual interest from the Bank of Italy that may have been under-reported, by the way. This time focused on the eurozone’s other two-tiered market — government bonds. As the report goes on:
The decrease in the correlation between the yields of Italian and German government securities in the wake of the crisis reduced the effectiveness of the previously common practice of using Bund-based derivatives to manage the risk on BTPs. In September 2009 the Eurex derivatives market accordingly introduced a 10-year BTP futures contract, followed in October 2010 by a 3-year BTP futures contract. Although these contracts have not yet aroused any great interest among investors, looking ahead they could increase the liquidity of Italian securities and help to curb their volatility and yields…
We were wondering when other peripheral sovereigns would get their own contracts for even greater hedging purposes — but then providing futures on a dying asset class is kinda tragic, perhaps.
Sure is interesting to watch all this euro divergence unfold.
Related links:
The secured lending boom - FT Alphaville
Mi casa es su casa – Spanish clearing and collateral – FT Alphaville
Back to the future in shorting Spain – FT Alphaville