Europe fears U.S. push for repo fire sale risk rule

Reuters

By Huw Jones

LONDON, Oct 16 (Reuters) - A key European market forfinancing banks and companies fears the United States will useits political clout to push through ill-suited global rules tocut the potential risk of fire sales in assets used to backtransactions.

New York Federal Reserve Bank President William Dudley saidearlier this month the $5 trillion U.S. market for repurchaseagreements or repos must work harder to cut risks or it may faceintervention.

Repos are short-term loans in return for collateral, such asgovernment or corporate bonds, and are key element of day-to-dayfinancing in the economy.

The Fed has suggested a "resolution authority" to scoop upcollateral held by a struggling or bust broker to avoid a firesale of bonds that could disrupt markets.

"I worry that a mainly American problem is being exported,and that this could itself have a destabilising effect,"Godfried De Vidts, chairman of the European Repo Council, partof the International Capital Markets Association, told Reuters.

Industry officials, speaking at the annual European RepoCouncil conference on Wednesday, said a "one size fits all" rulewould not work in Europe's 6 trillion euro repo market.

"The structure of the market in Europe is completelydifferent so we are not subject to the same concentration ofrisk of fire sales," said Richard Comotto, author of theEuropean Repo Council's market surveys.

The Financial Stability Board, which coordinates globalregulation for the G20 group of leading economies, proposed newrules for making the repo market safer in August.

It stopped short of proposing changes to the market'sstructure but one FSB member signalled the draft rules may notbe the end of the story given the U.S. fire sales concerns.

"I think particularly in the U.S. there may be moreregulatory initiatives in that area," David Rule, a UK regulatorwho chairs the FSB's repo market group, told the meeting.

A "resolution authority" could buy the collateral from abust broker, hold it and sell the assets over time to avoid firesales, with losses or gains passed on to whoever held theoriginal positions.

De Vidts said more thought was needed.

"Should there be a resolution authority for repo? Wouldcentral banks guarantee the general price for the collateralfund in the resolution authority? I don't think they are readyto do that. Simply collecting together the collateral does notprevent its price from going down," De Vidts said.

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