Date: 2 March 2022
Time: 2pm – 3.30pm | Location: J.P. Morgan at 60 Victoria Street
Minutes
Item 1 – Welcome
The Committee was informed that Andrew Hauser has stepped down as Chair, with Rhys Phillips, Head of Sterling Markets at the Bank of England, taking over.
The Chair thanked members for attending and JP Morgan for hosting, and also welcomed Jordan Broad from NatWest to the Committee who would be acting as an alternate for Rachel Lane at coming meetings.
It was confirmed that the Minutes of the December 2021 meeting had been published on the Bank’s website.footnote [1]
Item 2 – Discussion on market conditions
A broad update on developments and conditions in global markets was presented by a member of the Committee, highlighting in particular the impact of year end and recent moves in interest rate markets.
It was noted that there had been the usual volatility into year end, but given the amount of pre-planning completed by counterparties markets conditions had been less impacted than was initially expected given factors including the proximity to a potential MPC rate hike in December.
Members suggested that liquidity in the repo market had been thin at year-end, but that functioning remained orderly. The shortage of collateral around year end – and indeed more generally - was highlighted as important. In cash markets, volumes were noted to be lower than year end 2020 and sterling FRA-OIS trading negative was noted as being reflective of cash being lent at lower rates than overnight. In Euro markets, repo had not been as rich as had been feared, as the cross-currency basis moved back to parity going into year end, alleviating some market pressure.
Turning to developments since year-end, the Committee discussed the persistent upside inflation surprises that had occurred in recent months, albeit more recently being juxtaposed with downside growth risks. This had contributed to rates volatility in recent days, and to curve flattening since the start of the year. The current geopolitical situation and the subsequent sanctions were expected to continue to exacerbate this picture, with supply side pressures expected to occur as the situation in Ukraine developed.
Members noted that uncertainty about the exact implementation of sanctions was a concern at present, but one that was expected to be resolved promptly by Government.
Item 3 – Pricing term trades post-LIBOR cessation
A member raised that the current pricing mechanism for unsecured term trades does not reflect term premia and credit as had been the case prior to the cessation of Libor given the method of SONIA fixing. There had been recent significant price movements, but it had been unclear as to whether rates should be linked to purely funding demand, credit considerations, increased risk premia or impacts of the cross-currency basis. Since LIBOR had ceased there has been a lack of a benchmark, which incorporates credit and term-premia, against which to measure indicative pricing and this had led to some market opacity.
This lack of transparency on pricing for credit and term-premia in a post-LIBOR world could make it difficult for the market to find a level for unsecured term trades, potentially leading to an unintended compression in credit spreads between low and high quality issuers or making the identification of stress harder.
Members expressed a range of views on this topic, some agreeing the need for such a mechanism and another noting that the perceived issue was not a problem in practice.
Item 4 – Settlement fails in repo market
The Committee discussed the increase in sterling repo market fails that had been seen over the last year. Data suggested that fails were noticeably higher than the equivalent point in previous years and had risen again more recently.
Members thought the in fails could be a result of the increased volumes of collateral settlement and operational inefficiencies. Extending the DVP settlement window by 30 minutes was hoped to alleviate part of the problem.
Despite volumes being high, the Committee were unhappy that sufficient resources were being devoted to ensuring efficient settlement across the market. Given that the UK Money Market Code deals with this matter, it was decided that the Code Sub-committee would be asked to look at the issue further.
Item 5 – ESG and short-term money markets
The Committee discussed whether and how ESG investing was impacting on short-term money markets. It was noted that there could rarely be perfect clarity about the use of proceeds for ESG purposes, with some members suggesting there was a risk of products being seen as ‘green-washing’ given the short tenor of money market funding in comparison to financing longer-dated ESG qualifying assets.
Given that, some thought it could be preferable that investors were instead incentivised to focus on counterparties meeting minimum ESG criteria. But such criteria could not practically be set centrally, and so would be determined individually by each institution. This created the prospect of a lack of standardisation, which itself could make investment decisions harder.
Item 6 – Diversity and inclusion
The Bank noted that the ‘Meeting Varied People’ (MVP) team would be presenting an update on the progress of its initiative at an upcoming MMC meeting.
The Committee agreed to continue the approach that had been piloted in 2021, whereby members would, on rotation, bring along junior, diverse colleagues to future meetings as observers.
Item 7 – AOB
The Chair confirmed that the next MMC was scheduled for 21st June 2022, to be held in person at the Bank.
The Chair also noted that the Secretariat would be in contact with Committee members seeking suggestions for future agenda items for MMC meetings.
Committee attendees
Stephen Grainger – Aldermore
James Winterton – Association of Corporate Treasurers
Michael Manna – Barclays Bank UK
Emma Cooper – BlackRock
Ina Budh-Raja – BNY Mellon
Romain Dumas – Credit Suisse
Marije Verhelst – Euroclear
Nick Webb – Goldman Sachs (alternate)
Vicky Worsfold – Guildford Borough Council
James Murphy – HSBC
Chris Brown – Insight Investment
Olivia Maguire – J.P. Morgan Asset Management
Ben Challice – J.P. Morgan
Tony Baldwin – LCH
John Wherton – Legal & General Investment Management
Peter Left – Lloyds
Jordan Broad – NatWest (alternate)
Nic Erevik – Newcastle Building Society
Chirag Patel – Rabobank
Paul Barnes – Santander UK
Romain Sinclair – Société Générale
John Argent – Tradition
Jessica Pulay – DMO (Observer)
Alan Barnes – FCA (Observer)
Bank of England
Rhys Phillips (Chair)
Jon Pyzer
Nicole Webster
David Glanville
Apologies
Gordon Lowson – Abrdn
Robert Thurlow – Mizuho
Jo Whelan – DMO (Observer)