U.S. Markets closed

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

By Huw Jones

LONDON, Oct 16 (Reuters) - A key European market for financing banks and companies fears the United States will use its political clout to push through ill-suited global rules to cut the potential risk of fire sales in assets used to back transactions.

New York Federal Reserve Bank President William Dudley said earlier this month the $5 trillion U.S. market for repurchase agreements or repos must work harder to cut risks or it may face intervention.

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

The Fed has suggested a "resolution authority" to scoop up collateral held by a struggling or bust broker to avoid a fire sale 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, part of the International Capital Markets Association, told Reuters.

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

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

The Financial Stability Board, which coordinates global regulation for the G20 group of leading economies, proposed new rules for making the repo market safer in August.

It stopped short of proposing changes to the market's structure but one FSB member signalled the draft rules may not be the end of the story given the U.S. fire sales concerns.

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

A "resolution authority" could buy the collateral from a bust broker, hold it and sell the assets over time to avoid fire sales, with losses or gains passed on to whoever held the original positions.

De Vidts said more thought was needed.

"Should there be a resolution authority for repo? Would central banks guarantee the general price for the collateral fund in the resolution authority? I don't think they are ready to do that. Simply collecting together the collateral does not prevent its price from going down," De Vidts said.