At Instimatch Global we take a close interest in institutional money market trends and data, especially from central banks and regulators. Historically good data has been quite hard to come by for this market segment. So we got excited by the recent in-depth publication on money market activity from the ECB, updating a report it put out way back in 2015, and by the Bank of England’s six monthly qualitative money market survey. The ECB paper reports, for the first time, granular information on daily executed transactions, based on its money market statistical reporting since 2016 from the 50 biggest Eurozone banks, and including pricing, collateral and counterparty information. It is by far the most detailed analysis of the Eurozone money market to date.
The following points in the ECB report seem most insightful and relevant for participants in the unsecured money markets:
1. Significant cross-border flows
The ECB’s asset purchase programme (APP) prompted significant cross-border flows in the money market. Many sellers of the securities purchased under the programme were either non-banks – pension funds, insurance companies, asset managers, for example – or banks outside of the euro area.
2. Interbank, banks are net lenders
Owing to the environment of excess liquidity we still find ourselves in, banks generally have a modest need for cash (while at Instimatch we see constant demand from banks and other institutions for US dollars). However, market participants such as smaller credit institutions create the need for liquidity distribution. So, while interbank transactions remain relatively low overall, 15% of the total activity in the unsecured market, banks are lending more than borrowing.
3. Non-bank activity gathers momentum
While banks have not been hugely active, the share of activity from other financial corporations has grown steadily, reaching about 40% of the total in 2018. Meanwhile, another important group of counterparties, non-financial corporates, made up around 20% of total transactions. A diverse mix of counterparties in the market is beneficial, in our view.
4. Overnight is most common tenor in unsecured transactions
Between July 2016 and December 2018, the overnight tenor made up over 50% of the total turnover on the borrowing side. On the lending side, turnover is generally smaller and the percentage done on an overnight basis even higher, at 74%.
The study bears close reading for those involved, and is well illustrated with charts, for example showing overnight flows between countries, and locations of non-financial corporates depositing with Eurozone banks (showing an interesting concentration of activity out of France).
Bank of England reports uptick in counterparties in the unsecured segment
Turing to the Bank of England, its six monthly report captures market participants’ sentiment, surveying whether they sense conditions have worsened or improved when compared to the previous period.
Market functioning was overall positive, showing improvements in most market indicators since November 2018 across secured and unsecured markets. Most interestingly, compared to a year ago, respondents were most positive in saying that the number of counterparties they dealt with had increased, while neutral on market timeliness and somewhat negative on depth of the market.
Conclusion
Better visibility into money market activity and market participant behaviour is a welcome development. Increasingly, counterparty diversity and market visibility are critical to the functioning and the efficiency of this huge market (€120bn daily in unsecured Eurozone activity) used by banks, corporates, insurers and more on a daily basis.
By Daniel Sandmeier, CEO, Instimatch Global
