Development of Repo and Securities Lending Markets

1
Development of Repo and Securities Lending Markets

• Third Annual Meeting of Latin American and
  Caribbean Debt Management Specialists April
  19-20, 2007
• Anderson Caputo Silva
• Senior Debt Specialist
• The World Bank

2
Implications for market authorities

• Key implications of securities lending for market
  authorities can be grouped into four areas
• Understanding the securities lending market
• Supporting improvements in the securities lending
  market
• Monitoring potential abuses associated with the
  securities lending market
• Concerns about market stability
• Reference Securities Lending Transactions
  Market Development and Implications, IOSCO

3
Supporting improvements in the securities lending
market

• Sound policies can be particularly important in
  four areas
• the legal underpinnings of securities lending
  activities
• the accounting and capital treatment of
  securities lending transactions
• the market infrastructure and settlement
  arrangement for securities lending
• policies related to the risk management of
  securities lending activities
• Reference Securities Lending Transactions
  Market Development and Implications, IOSCO

4
Taiwan Bond and Private Repo Market
5
Taiwanese Government Bond Market
Monthly Turnover of Government Bonds
UnitNT Billion
Government bonds only Repo volume (of
government, corporate and supranational NT
bonds) Source Statistics from OTC Reference TSD
Seminar
6
Government Bond Market
Government Bond Outright / Repo Market
Phase I (19882000) Repo Development Period
(Stimulate liquidity and encourage market
participation)
Average daily outright trading volume NT 6
Billion Average daily repo trading volume NT 72
Billion
Average daily outright trading volume NT 32
Billion Average daily repo trading volume NT
182 Billion
In Billion NTD
Period 1993.1 to 2000.12
Source GreTai Securities Market Reference TSD
Seminar
7
Government Bond Market
Government Bond Outright / Repo Market
Phase II (2001Present) New Product
Development Period (Rely on ample liquidity of
repo and outright transactions)
Average daily outright trading volume NT 182
Billion Average daily repo trading volume NT
177 Billion
In Billion NTD
Period 2001.1 to 2006.12
Source GreTai Securities Market Reference TSD
Seminar
8
Country case Singapore

• Measures taken to develop the Singapore
  Government Securities market
• extending the benchmark yield curve
• establishing a public calendar of issuance
• adopting an issuance programme with the aim of
  building large, liquid benchmarks
• establishing a repo facility to support the
  primary dealers
• providing a pool of securities from which primary
  dealers could borrow to cover their short
  position arising from market-making activities
• Reference Teo Swee Lian Debt Market Development
  in Singapore

9
Country case Singapore

• An efficient repo market
• is a key element in a liquid bond market
• supports secondary market activities
• provides market players with a means of financing
  positions and enables them to take advantage of
  yield curve arbitrage opportunities
• facilitates portfolio management
• Reference Teo Swee Lian Debt Market Development
  in Singapore

10
Graph 1 Singapore government securities
outstandingIn billions of Singapore dollars

• Source BIS Papers No 11

11
Graph 2 Singapore government securities average
daily turnoverIn millions of Singapore dollars

• Source BIS Papers No 11

12
Graph 3 Repo market average daily turnoverIn
millions of Singapore dollars

• Source BIS Papers No 11

13
Country case Thailand

• Background
• The initiative on developing private repo market
  began in 1998
• MoF has set up a working group for bond market
  development with 8 sub-working groups
• Bank of Thailand has shown firm commitment to
  encourage the repo market by using bilateral repo
  transactions as a means to adjust market
  liquidity with its primary dealers
• Reference Private Repurchase Market Market
  Research and Development Team, Financial Market
  and Reserve Management Department, Bank of
  Thailand

14
Country case Thailand

• The main objectives of private repo market
  development
• To facilitate bond market development by
• Adding liquidity to the bond market
• Encouraging investment in bonds
• Stimulating the financial institutions to be
  active market markers
• Enhancing yield of the bondholders by lending it
  out
• Reference Private Repurchase Market Market
  Research and Development Team, Financial Market
  and Reserve Management Department, Bank of
  Thailand

15
Country case Thailand

• To broaden money market structure and to add on
  instrument to the market toward collateralized
  term loan
• To act as a channel for central bank open market
  operations
• To be used as an alternative hedging instrument
• Reference Private Repurchase Market Market
  Research and Development Team, Financial Market
  and Reserve Management Department, Bank of
  Thailand

16
Country case Thailand

• Essential features and market practices for a
  sound and efficient repo market
• An adequate legal framework
• Secure and efficient settlement system
• Appropriate haircuts and margin call practices
• Adequate transparency
• Reference Private Repurchase Market Market
  Research and Development Team, Financial Market
  and Reserve Management Department, Bank of
  Thailand

17
The importance of developing repo market

• A common finding in Debt Market Development
  needs assessments conducted by the World Bank
  (e.g. Colombia, Kenya, Lebanon, Pakistan,
  Tunisia etc.)
• Colombia Excellent example of implementation of
  an action plan for money market development
• improvements in the legal framework, including
  accounting and prudential regulations for repos,
  sell-buybacks and securities lending
• automated facility for securities lending
• improvements in the T-Bills market
• Reference Debt Market Development Report
  (several countries), Capital Markets Group, The
  World Bank

18
THANK YOU!
Anderson Caputo Silva
Senior Debt
Specialist
Capital Markets Group

The World Bank

asilva3_at_worldbank.org
19
Conclusions

• Signs of convergence from the mid-1990s onward
  in the EMU, non-EMU, and many other
  industrialized countries
• A salient feature dominant instrument used by
  central banks
• A general explanation answers well to many of
  the needs of central banking
• Central banks have broadened their collateral
  base to make repo transactions feasible
• Reference Jens Forssbæck and Lars Oxelheim,
  2006, The Interplay between Money Market
  Development and Changes in Monetary Policy
  Operations in Small European Countries, 19802000

20
Repurchase Agreements (repos)

• A tool to foster secondary markets
• Serve unique functions for both the private
  sector and the monetary authority
• Occurring among a range of market participants,
  including banks, financial institutions, and
  corporates
• Reduce both credit risk and transaction costs
• Reference Developing Government Bond Market, The
  World Bank

21
Key elements need to be governed in repo
transactions

• Payment and transfer
• Default and netting
• Margins
• Substitution
• Interest payments
• Reference Developing Government Bond Market, The
  World Bank

22
Risks in Repurchase Transactions

• Interest Risk
• Increases with
• the time to maturity of the underlying security
• the length of the repo contract
• Credit Risk
• A possibility that either party may fail to honor
  the future transaction
• Operational Risk
• If ownership of the repoed security is not
  transferred on the official registry or
  subdepository
• Reference Developing Government Bond Market, The
  World Bank

23
The importance of developing repo market

• Some Country examples from WB Technical
  Assistance
• Kenya
• introduce Master Repurchase Agreement
• develop a sterilization plan which targets a set
  level of liquidity
• Lebanon
• introduce Master Repurchase Agreement based on
  ISMA or EMA
• establish the procedure for the indices
• Reference Money Market Development Report,
  Capital Markets Group, The World Bank

24
The importance of developing repo market (cont)

• Pakistan
• Shift its monetary policy target
• Refine the reserve requirement structure
• Tunisia
• Laws on repos need to be adjusted
• Treasury should be an active participant
• Reference Money Market Development Report,
  Capital Markets Group, The World Bank