While most were expecting the ECB to extend its QE program by at least 6 months (it did so by 9) and not to taper (it did so by cutting the monthly purchases from €80 to €60 billion), another just as prominent question was whether the ECB would tackle the problem of collateral shortage, and if so how. After all, as we have shown in the past few weeks, while there has been a selloff in the Bund long end, the short end, especially 2Y Bunds, have seen their yields tumble to record lows as financial institutions loaded up on securities to satisfy collateral demands.
Moments after Draghi's presser, the ECB addressed the issue of the Eurosystem's persistent collateral shortage issue in a press release "Eurosystem introduces cash collateral for PSPP securities lending facilities" in which as the name implies, the ECB has introduced the use of cash as acceptable collateral, a step which will alleviate the incipient collateral shortage in the Eurosystem. Specifically, the ECB noted:
- New possibility to use cash as collateral
- Pricing will be linked to the deposit facility rate
- Changes aim to enhance effectiveness of PSPP securities lending
- Maximum overall limit of €50 billion for the Eurosystem
The full release below"
Today, the Governing Council decided that Eurosystem central banks will have the possibility to also accept cash as collateral in their PSPP securities lending (SL) facilities without having to reinvest it in a cash-neutral manner.
The following Eurosystem members will make securities lending available also against cash collateral by 15 December 2016: the ECB, Nationale Bank van België/Banque Nationale de Belgique, Deutsche Bundesbank, Central Bank of Ireland, Banco de España, Banque de France, and De Nederlandsche Bank.
The overall limit for securities lending against cash collateral is set at €50 billion for the Eurosystem. To avoid unduly curtailing normal repo market activity, the cash collateral option will be offered at a rate equal to the lower of the rate of the deposit facility minus 30 basis points (i.e. currently -70 basis points) and the prevailing market repo rate.
The introduction of cash as collateral in the context of PSPP securities lending is intended to enhance the effectiveness of the SL framework, thereby supporting the smooth implementation of the PSPP as well as the euro area repo market liquidity and functioning. This technical amendment does not represent any change in the monetary policy stance of the Eurosystem. It will be reviewed in light of operational needs and the level of excess liquidity.
Following the news, 2Year Bunds have been quickly sold off, with the yield rising by 6 bps to start, as suddenly it makes more sense to park cash with the ECB than to be penalized by -0.7% to hold German short-term debt.