The New Regulations and their Impact on

the Repo Market

Amanda Butavand, Director, Repo Sales

Contact Details
Amanda Butavand
www.ca-cib.com [email protected]
Contents

1. New Regulatory measures: LCR, NSFR, SRF, CSDR mandatory buy-ins 02

2. What is the impact on the Repo Markets? 05

3. How did CA-CIB adjust its business? 07

4. Conclusion 08

5. Credit Agricole CIB 09

6. Disclaimer 11

Page 1 The new Regulations and their Impact on the Repo Market February 2016
New Regulatory measures:
LCR, NSFR, SRF, CSDR mandatory buy-ins (1/3)

 Liquidity Coverage Ratio – LCR

● The Liquidity Coverage Ratio, or LCR, requires banks and other financial institutions to hold enough cash and liquid
assets on hand to confront a month-long period of market stress. The ratio is found by dividing a firm's liquid assets by
its projected net cash outflow. Financial institutions must have enough cash available to cover their total net cash
outflows over a 30-day period.

𝐒𝐒𝐒𝐒𝐒𝐒𝐒𝐒𝐒𝐒 𝐨𝐨𝐨𝐨 𝐮𝐮𝐮𝐮𝐮𝐮𝐮𝐮𝐮𝐮𝐮𝐮𝐮𝐮𝐮𝐮𝐮𝐮𝐮𝐮𝐮𝐮𝐮𝐮 𝐇𝐇𝐇𝐇𝐇𝐇𝐇𝐇

𝐋𝐋𝐋𝐋𝐋𝐋 = ≥ 100%
𝐓𝐓𝐓𝐓𝐓𝐓𝐓𝐓𝐓𝐓 𝐍𝐍𝐍𝐍𝐍𝐍 𝐂𝐂𝐂𝐂𝐂𝐂𝐂𝐂 𝐎𝐎𝐎𝐎𝐎𝐎𝐎𝐎𝐎𝐎𝐎𝐎𝐎𝐎𝐎𝐎 𝟑𝟑𝟑𝟑 𝐝𝐝𝐝𝐝𝐝𝐝𝐝𝐝

 Net Stable Funding Ratio – NSFR

● Funding requirement to maintain a minimum amount of stable funding over a 1 year horizon in relation to the liquidity
characteristics of assets, liabilities and off-balance sheet items

Available Stable Funding (ASF)

NSFR = ≥ 100%
Required Stable Funding (RSF)

● To mitigate funding risk over a longer time horizon and to prevent from excessive maturity transformation

● Complement to the LCR (to strengthen the short term liquidity profile under stress conditions)

Page 2 The new Regulations and their Impact on the Repo Market February 2016
New Regulatory measures:
LCR, NSFR, SRF, CSDR mandatory buy-ins (2/3)
 The EU Single Resolution Fund is a key tool of the Single Resolution Mechanism for the Banking Union

● Set up pursuant to the adoption of Regulation establishing a Single Resolution Mechanism (SRM) for the Banking
Union, the Single Resolution Fund (SRF) is to be implemented on 1 January 2016

● SRF will replace national resolution funds implemented in January 2015 under the Bank Recovery and Resolution
Directive for 26 Member States – the UK and Sweden have not signed the intergovernmental agreement for the transfer
of their resolution fund to the SRF

● SRF will be built with annual contributions of individual credit institutions authorized in those Member States

 Contributions based on liabilities – excluding own funds and covered deposits – and a risk-adjusted contribution depending on
the risk profile of that institution

 SRF target level is at least 1% of the amount of covered deposits of all credit institutions in the participating countries by 2023
(a 2011 estimates put the target size at EUR 55bn

SRF = x% (all liabilities – own funds – covered deposits)

Page 3 The new Regulations and their Impact on the Repo Market February 2016
New Regulatory measures:
LCR, NSFR, SRF, CSDR mandatory buy-ins (3/3)

 CSDR mandatory buy-ins

● Mandatory buy-ins will occur if the seller of a security or bond does not have them delivered to the buyer within four
business days for liquid securities, and within seven business days for illiquid securities.

● CSDs will be required to operate a mandatory buy-in of trades which fail to settle and then deliver them to the non-
defaulting counterparty.

Page 4 The new Regulations and their Impact on the Repo Market February 2016
What is the impact on the Repo Markets? (1/2)

 LCR
● Increased demand to hold HQLA reduces the supply of HQLA for repo markets. At certain times it potentially reduces
the liquidity and adds some volatility to the repo market, particularly in times of stress. It also adds a price premium.
Higher haircuts are being applied for non HQLA bonds.
● HQLA bonds rarely provide high returns which increases the cost of capital for this buffer .
● One positive effect: We now see new transactions on HQLA vs. Non-HQLA bonds. Some banks are indeed long LCR
and start selling a part of it. In particular, we noticed a bigger participation of Treasury desks on the market. They lend
out HQLA to generate additional revenue.

 NSFR
● Penalty when funding comes from financial institutions as seen as less stable.
Problem: today repo funding rely mainly on financial institutions.
● Looking at under 6 Months trades: it will create an incentive to Repo more with Corporates/Sovereigns/Multilateral
Development Banks/ Public Sector Entities . On the Reverse Repo side, there will be an increased value to trade with
Central Banks.

Page 5 The new Regulations and their Impact on the Repo Market February 2016
What is the impact on the Repo Markets? (2/2)

 SRF
● Competition between banks to pay the smallest share of the SRF
● Increased pressure on year-end balance sheet picture
● Netted transactions are not impacted

 Mandatory buy-ins:
● Most of the fails today on the repo market happen on illiquid bonds. The aim of this regulation would be to avoid fail and
increase the liquidity of the market but these penalties might actually have the opposite effect and reduce repo trading
on such bonds.
● Can affect relationships within the market. In the current environment, buy-in is the last resort tool.
● The cost of buy-in will be passed on to the end-client via wider bid/offer spread.

Page 6 The new Regulations and their Impact on the Repo Market February 2016
Case Study: How Credit Agricole CIB is adjusting to these changes?

 CCP and Bilateral netting:

● Pushing trades through CCP for Inter-Bank market
● Working with peers to set standard netting dates in LCH
● Preference to trade France in ICSD in order to net vs. Germany, Netherlands etc…

 Development of Securities Lending

● Collateral vs. collateral FOP trades would release pressure on the balance sheet.
● Diversification of client segments. For example more sources for HQLA bonds.

 Closer Relationships with clients

● Partnership in finding optimal set up.

 Allocation of balance sheet to clients closely monitored:

● All-products side-business
● Netting capacity (client trades both ways)
● Repo profitability

Page 7 The new Regulations and their Impact on the Repo Market February 2016
Conclusion and take-aways

 Market is adjusting rapidly to the new regulations

 Clear downward pressure on Repo / Rev Repo activities resulting from implementation of Liquidity and balance
sheet ratios

 But specific actions can mitigate this trend. Also, there will be opportunities. In particular under hypothesis of
increased use of CCPs and bilateral netting, development of Securities Lending.

 Not all ratios are implemented simultaneously, hence impacts will occur and will be managed over time.

Page 8 The new Regulations and their Impact on the Repo Market February 2016
Crédit Agricole Marketing Document
Crédit Agricole CIB (1/2)
Crédit Agricole CIB is the Corporate and Investment Banking arm of the Crédit Agricole Group. It offers its clients a comprehensive range of products and services in
capital markets, investment banking, structured finance and corporate banking.

The Bank provides support to clients in large international markets through its network with a presence in major countries in Europe, America, Asia and the Middle East.

The Global Markets Division: Our business model

 Handles all the sales and trading activities of standard and structured market Crédit Agricole CIB has a clear strategy centered on its role as a debt house.
products for corporate, financial institution and large issuers
 Has a targeted presence in the United States and additional entry points in
other local markets
 Has a network of 20 trading rooms
 Operates out of Five liquidity centres in London, Paris, New York, Hong Kong
and Tokyo
 Provides its clients with strong positioning in Europe, Asia and the
Middle East

In order to best satisfy the specific requirements of its clients, the Global Markets
division is organised around a Client division, a Trading division and a Treasury
department. These trading and sales entities are supported by dedicated research
units.

In each of these activities, Crédit Agricole CIB ranks among the world’s top players.

Crédit Agricole CIB Credit Ratings

Crédit Agricole CIB

Ratings Agencies Short Term Long Term

Standard & Poor’s (13 July 2015) A-1 A (negative outlook)

Fitch Ratings (23 June 2015) F1 A (positive outlook)

Moody’s (23 June 2015) P-1 A2 (positive outlook)

Page 9 The new Regulations and their Impact on the Repo Market February 2016
 Crédit Agricole Marketing Document
Crédit Agricole CIB (2/2)
Crédit Agricole CIB (CACIB) benefits from its parent Developing innovative financial solutions for its clients
company’s rating through the affiliation mechanism
Structured Finance: Investment Banking:
 Crédit Agricole S.A., as the Central Body and as a  World leader since 1997 in project finance  Specialised advisory services for social
member of the Crédit Agricole Network, is required (in for renewable and environmental investment projects
accordance with Article L511-31 of the French energies and infrastructures as well as Abiding by strict guiding principles
Monetary and Financial Code) to take all necessary Public Private Partnerships (PPP)  When financing the economy in sectors
measures to ensure that each and all of the Crédit  Founding member of the Equator with high environmental and social
Agricole Network members and its affiliated members - Principles impacts, e.g. defense, energy and
essentially the Regional Banks and CACIB - (both transport
defined in Articles R512-18 and L511-31 of the French Global Markets
 Co-author of Green Bond Principles to Supporting innovation through innovative
Monetary and Financial Code) maintain satisfactory
help issuers and investors deploy capital partnerships
liquidity and solvency; this requirement, being
enshrined in public law, is considered to be even for climate change mitigation  Supporting the Finance and Sustainable
stronger than a guarantee.  Global leader in Green Bonds Development Chair of the University of
Paris-Dauphine and Ecole Polytechnique:
 For further information please ask your CACIB contact. first methodology for quantifying CO2
emissions related to a bank’s activity as a
result of the financing it provides to its
Crédit Agricole CIB International Network
clients.

Green & Sustainability Bonds issued 2012-2015 – EUR & USD

Total Share
2014 & 2015 Global Capital Awards Bookrunners #deals
(USD m illion) (%)
Best SRI / Green Bond Lead Manager Crédit Agricole CIB 7 512 43 13%
1

 Innovation in Green Bonds 2 BoAML 6 566 50 11%

● 1st
Benchmark Corporate Green Bond 3 Morgan Stanley 5 258 35 9%

● 1st Green Covered Bond 4 JP Morgan 4 224 29 7%

● 1st European High Yield Green Bond 5 Citigroup 4 039 29 7%

6 SEB 3 772 22 6%

Crédit Agricole CIB is bookrunner of 48% 7 HSBC 3 135 19 5%

of the amount of Green & Sustainability 8 Deutsche Bank 2 427 13 4%

Bonds issued since 2012 (all currencies) 9 BNP Paribas 1 982 21 3%

10 Rabobank 1 625 12 3%

Source: Market data, Crédit Agricole CIB, as of end of June 2015

Page 10 The new Regulations and their Impact on the Repo Market February 2016
 Disclaimer
© 2015 CRÉDIT AGRICOLE CORPORATE AND INVESTMENT BANK, all rights reserved.
The information presented in this document (this “Presentation”) has been prepared by Crédit Agricole Corporate and Investment Bank or one of its
affiliates (together with their respective directors, officers or employees, “CA-CIB”). It has been provided to you for your information on a strictly
confidential basis, solely for your use and it may not be reproduced or distributed without the written permission of CA-CIB.

No Offer:
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Non-Reliance on CA-CIB:
CA-CIB does not act as a fiduciary or advisor to any recipient of this Presentation. Nothing contained in this Presentation should be considered as a
recommendation to enter into any transaction or contract.
CA-CIB makes no representation as to the suitability of any transaction or contract or the tax, legal, regulatory or accounting treatment of any transaction
or contract that may be described in this Presentation. You should ensure that prior to entering into a transaction or contract you have: (i) fully
investigated, analysed and understood the potential risks, rewards and implications of the transaction or contract; and (ii) determined that it is suitable in
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Regulatory Status:
Crédit Agricole CIB is authorised by the Autorité de Contrôle Prudentiel et de Résolution (ACPR) and supervised by the European Central Bank (ECB),
the ACPR and the Autorité des Marchés Financiers (AMF) in France and subject to limited regulation by the Financial Conduct Authority and the
Prudential Regulation Authority. Details about the extent of our regulation by the Financial Conduct Authority and the Prudential Regulation Authority are
available from Crédit Agricole CIB London branch on request.
Crédit Agricole CIB is incorporated in France with limited liability and registered in England & Wales. Registered number: FC008194. Branch No. BR
1975. Registered office: Broadwalk House, 5 Appold Street, London, EC2A 2DA.
Page 11 The new Regulations and their Impact on the Repo Market February 2016