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This is the fourth in the series of annual reports which began with an analysis of the stresses and dislocations witnessed in the euro denominated market at 2016 year-end, which were unprecedented, and caught market participants and authorities off guard. In many respects, the extremities of 2016 were the culmination of a perfect storm of factors, including market positioning, dislocations in the EUR/USD FX basis, an excess of euro cash in the banking system, and a reduction in the intermediation capacity of dealers due to regulatory reporting requirements.
While subsequent year-ends have not been as stretched, they have nonetheless continued to raise concerns among both liquidity providers and market users. What the 2017 and 2018 year-end reports reveal is a change in behaviour, both on the sell-side and buy-side. In the case of dealers, we observe more balance sheet being put to use over the turn (particularly by the non-GSIB community), while asset managers have stepped up preparedness, locking in financing needs early, negotiating balance sheet allocation from their dealers well in advance, or turning to alternative money market instruments to manage their liquidity. This has not, however, prevented significant price moves in both general collateral and specific issues.
In brief, compared to previous year-ends, 2019 was relatively uneventful. As one market participant commented, it was possibly the most subdued year-end of the decade. But the reasons for this are in themselves worthy of analysis and further discussion.