Upcoming Changes to ECB Policy Tools

Everyone's talking tokenisation. Meanwhile, the ECB just doubled down on repo. Reuters broke it this week: the ECB is expanding its EUREP facility—making euro repo lines cheaper, easier to access, and available to more countries. 35 years watching central bank plumbing. This tells you everything about where we actually are. 𝗪𝗵𝗮𝘁'𝘀 𝗮𝗰𝘁𝘂𝗮𝗹𝗹𝘆 𝗵𝗮𝗽𝗽𝗲𝗻𝗶𝗻𝗴: EUREP is the Eurosystem's repo facility for foreign central banks. Not FX swaps—repo. Foreign CBs borrow euros against euro-denominated collateral. Currently limited to eight neighbouring countries with tight caps and penalty pricing. The changes under discussion: → Lower surcharges → Standardised documentation → Eased borrowing caps → Expanded eligibility beyond the current neighbourhood Translation: The ECB is building a standing euro backstop for non-euro banking systems. Technical details land Thursday at Munich. 𝗧𝗵𝗲 𝗯𝗶𝗴𝗴𝗲𝗿 𝗽𝗶𝗰𝘁𝘂𝗿𝗲: This also reduces reliance on short-dated FX swaps—the daily fix EU banks use to finance their USD loan books by selling euros on a swap basis. It's a daily solution to a long-term structural problem. The cross-currency basis shows it. A permanent, cheaper repo facility changes that equation. Term funding. Predictable pricing. Less basis volatility. 𝗧𝗵𝗲 𝘀𝘁𝗿𝗮𝘁𝗲𝗴𝗶𝗰 𝗳𝗿𝗮𝗺𝗶𝗻𝗴: This isn't just liquidity infrastructure. It's economic diplomacy. Lagarde has been explicit: liquidity lines are a tool to extend the euro's international reach. With investors reassessing dollar assets, the ECB sees an opening. Kocher's recent remarks connect the dots—Europe preparing for a larger safe-haven role. 𝗧𝗵𝗲 𝘁𝘄𝗼 𝗹𝗮𝗻𝗲𝘀: Digital money and tokenisation are coming. I've just completed Cambridge's programme on it. I'm rewriting my course material. The infrastructure is real. But revenues? A way off. Firms need a strategy, not a revenue forecast. Repo? Still delivering. Still the backbone of global liquidity. Still where central banks turn when they need to move fast. The ECB isn't betting on tomorrow's plumbing. They're reinforcing today's. 𝗣𝗮𝘁𝘁𝗲𝗿𝗻 𝗿𝗲𝗰𝗼𝗴𝗻𝗶𝘁𝗶𝗼𝗻: Every time there's a new paradigm, watch what the institutions actually build. Not what they talk about at conferences. The Fed expanded swap lines. The ECB is expanding repo lines. The BoE is consulting on gilt repo resilience. The shiny new thing gets the headlines. The plumbing that works gets the capital. 𝗧𝗵𝗲 𝗯𝗼𝘁𝘁𝗼𝗺 𝗹𝗶𝗻𝗲: Tokenisation is the next chapter. Repo is the current one. Know the difference. Plan for both. But don't confuse which one pays the bills today. The plumbing is changing. Fast. Follow Glenn Handley for unfiltered market intelligence. --- P.S. If you want to understand how repo actually works—from the plumbing to the politics—my courses cover it all. Details here: https://lnkd.in/e8uuYWTS

"The #Eurosystem aims to modernise central bank money in response to the transformation taking place in #payments and finance. #Digitalisation is reducing the role of cash, increasing our external dependencies. #Tokenisation and #distributed_ledger_technology (DLT) could transform financial transactions. … There has been a significant increase in the adoption of #financial_technology, particularly distributed ledger technology (#DLT) and the digital representation of assets on programmable platforms (tokenisation).   DLT can enhance #efficiency: trading, #settlement and #custody on same platform; 24/7/365 operating hours; #smart_contracts to automate and speed up processes between issuers & investors.   A shared DLT platform could lower barriers to entry, enabling small and medium-sized enterprises to access capital markets. To address market demand, the Eurosystem has conducted exploratory work to test DLT for the settlement of #wholesale_transactions in #central_bank_money.   Next step: in the short-term, offer a platform for the settlement of DLT-based transactions in central bank money through an interoperability link with #TARGET Services.   Looking further ahead: the Eurosystem will explore a more integrated, long-term solution. Opportunity to create an integrated European market for #digital_assets (digital capital markets union) from the outset"   — From: Piero Cipollone, Member of the Executive Board of the #ECB, Modernising central bank money in response to digitalisation and fragmentation, Osservatorio Banca Impresa 2030, June 16, 2025   The full document is here: https://lnkd.in/e_GMxwTB

The European Central Bank just made a big move on climate and capital: They've announced a new climate factor on pledged collateral. Why have they taken this step? The idea behind the move is that this climate factor will help protect the Eurosystem against a potential decline in collateral value in the event of climate-related shocks. Essentially, some collateral may not be as valuable as it appears if it is impacted by climate or transition risks. To avoid a situation of dangerous undercollateralization, this factor has been created. Who does it apply to and when? The factor will apply to marketable assets issued by non-financial corporations, and will come into effect in the second half of 2026. Will other central banks follow? The ECB has taken a leading role on climate-related financial risks, so other regulators are likely watching this move closely. Research at other central banks into capital factors is also underway. Two central banks to watch are the Bank of England and the Bank of Canada to see whether they introduce similar measures shortly. Looking to understand emerging risk and regulatory topics and get your firm ready? Check out our weekly newsletter for more insights on how these changes will affect you (see my bio and in the comments). #climate #ecb #climaterisk #finance #regulation

Dialling back Next week ECB will meet. Anything but a 25bp rate cut would be a major surprise to markets and analysts. The staff projections should reflect the slight moderation in the labour market and economic activity since the June meeting, and thus fuel confidence in the disinflationary process being on track in light of diminishing topside risks. As a result, we may only see some shifts in the quarterly profile and not a large change to the narrative. In annual figures this may result in minor changes, particularly taken from a market perspective, given the uncertainty of forecasting inflation and the economy two years out. On the communication front, we expect Lagarde to confirm that the ECB has entered the dialling back phase, but importantly that she will add that it is not a commitment to specific timing of further rate cuts nor a specific terminal rate target. That means the ECB is not expected to deviate from the meeting-by-meeting and data-dependent approach to policy rate changes, thus keeping its guidance with optionality and flexibility. This is important also in light of what happens with the US economic outlook, and the risk of spillover to the euro area; flexibility must be seen as essential. Today's chart shows the number of additional rate cuts that markets are pricing for 2024, 2025 and 2026. Markets are currently trading the October ECB meeting at 10bp, which does not offer a great risk / reward in our view. While I still do not anticipate that the ECB will cut in October, markets will likely only price that out after the Fed meeting in two weeks, and thus being active in markets you may have been at risk of hitting a stop loss along the way. We do not find the risk/reward particularly attractive. It is quite interesting though that the market pricing for this year has come somewhat higher (lower October rate cut pricing), but at the same time the 2025 segment has seen slightly more cuts priced in. This shift in pricing of rate cut expectations (and probability mass) from 2024 to 2025 has also been supported by a lower terminal rate / trough point to slightly lower than 2%. Markets are discounting 110bp of cuts in 2025. Markets are inconsistent these days when you compare inflation and €STR swaps. Looking at the inflation fixings for next year, the HICP ex tobacco (tobacco has historically added 0.1pp to inflation fixings) is set to average just 1.64% in 2025 and 1.71% in 2026. This means that the 2025 inflation fixings equate to a roughly 0.13% m/m inflation, and that is very low in our expectations. If the inflation profile that markets are pricing does materialise, we should also assume that €STR swaps should price in significantly more rate cuts than they do currently, and well below the neutral rate level to support the economy. Inflation market pricing is roughly consistent with one of the downside risk scenarios that we discussed last week. Have a great weekend! Full piece in comment