BoE published a working paper that analyzes the effects of the European Market Infrastructure Regulation (EMIR) and Basel III regulations on short-term interest rates. EMIR requires central clearing houses (CCP) to continually acquire safe assets, thus expanding the lending supply of repurchase agreements (repo). Basel III, in contrast, disincentivizes the borrowing demand by tightening balance-sheet constraints of banks. Using unique datasets of repo transactions and CCP activity, compelling evidence has been found for both supply and demand channels.
The information to be provided by a third party seeking authorization to assess the compliance of securitizations with the STS criteria provided for in Securitization Regulation should enable a competent authority to evaluate whether and, to what extent, the applicant meets the conditions of Article 28(1) of the Securitization Regulation. An authorized third party will be able to provide STS assessment services across EU. The application for authorization should, therefore, comprehensively identify that third party, any group to which this third party belongs, and the scope of its activities. With regard to the STS assessment services to be provided, the application should include the envisaged scope of the services to be provided as well as their geographical scope, particularly the following:
To facilitate effective use of the authorization resources of a competent authority, each application for authorization should include a table clearly identifying each submitted document and its relevance to the conditions that must be met for authorization.
To enable the competent authority to assess whether the fees charged by the third party are non-discriminatory and are sufficient and appropriate to cover the costs for the provision of the STS assessment services, as required by Article 28(1)(a) of Securitization Regulation, the third party should provide comprehensive information on pricing policies, pricing criteria, fee structures, and fee schedules.
To enable the competent authority to assess whether the third party is able to ensure the integrity and independence of the STS assessment process, that third party should provide information on the structure of those internal controls. Furthermore, the third party should provide comprehensive information on the composition of the management body and on the qualifications and repute of each of its members.
To enable the competent authority to assess whether the third party has sufficient operational safeguards and internal processes to assess STS compliance, the third party should provide information on its procedures relating to the required qualification of its staff. The third party should also demonstrate that its STS assessment methodology is sensitive to the type of securitization and that specifies separate procedures and safeguards for asset-backed commercial paper (ABCP) transactions/programs and non-ABCP securitizations.
The use of outsourcing arrangements and a reliance on the use of external experts can raise concerns about the robustness of operational safeguards and internal processes. The application should, therefore, contain specific information about the nature and scope of any such outsourcing arrangements or use of external experts as well as the third party's governance over those arrangements. Regulation (EU) 2019/885 is based on the draft regulatory technical standards submitted by ESMA to EC.
The analysis presented in the paper has been conducted based on two unique and granular datasets. The first dataset includes all Euro and Sterling repos traded in the three main interbank platforms (BrokerTec, Eurex Repo, and MTS Repo) and this dataset covers more than 70% of the total European repo market. The second dataset contains the reverse repo and bond investments of clearing houses, with reporting obligations to BoE from November 2013 to December 2017. Three main results emerge from the study:
First, to conform to new regulation, clearing houses’ lending exerts a pervasive and systematic downward pressure on short-term rates. CCPs’ reverse repos to purchase EMIR-eligible assets significantly decrease short-term interest rates, thus supporting the supply hypothesis.
Second, this effect increases during quarterly reporting dates, that is, when the Basel III leverage ratio imposes balance sheet constraints on banks demanding (but not lending) repos. This evidence suggests that the joint regulatory effects of EMIR and Basel III further decrease short-term rates, thus supporting the demand hypotheses.
Third, it is found that regulatory-driven supply has significant adverse effects on price dispersion and lending volume. Supply induced by regulation increases the net supply of repos in the interbank market, the cross-sectional dispersion of short-term rates with strongest effects on the safest assets, and the time-varying forward discount. The overall effects are decreasing short-term rates and increasing market imbalances in various forms, all of which entail unintended consequences originated from the new regulatory framework.
