It started being phased in at the start of 2015 and reaches full application by 2018. The LCR consequently makes short-term funding less attractive to banks and holding HQLA more attractive. The requirement to meet this ratio is likely to be a contributory factor in market volatility around reporting dates. The NSFR is designed to reduce bank reliance on short-term wholesale funding relative to more stable sources of funding. It penalises short-term funding, including repos of shorter maturity than one year, particularly those under six months. The NSFR also penalises matched book transactions, since the negative impact of the reverse repo leg more than offsets the positive impact of the repo leg. Overall, the impact from the NSFR on short-term repo is reckoned to be lower supply, reducing volumes and increasing the price. The leverage ratio, which has been implemented in the United States for some time, is a deliberately simplified way to assess banks’ riskiness. Traditional bank capital ratios are calculated as capital over risk-weighted assets. The leverage ratio is calculated approximately as capital over total assets, with no attempt to employ risk weights. This is important for the repo market because sovereign bonds typically attract a zero risk weight. As such, carrying out repo as a large volume, low margin activity is threatened by the leverage ratio. Although the exact parameters of the leverage ratio regulations have not been 2/5  BIS central bankers' speeches  finalised, euro area banks are required to report leverage ratios.
Given the higher relative penalty given to holding sovereign bonds under the leverage ratio as opposed to the capital ratio, it is expected to increase the cost of banks’ repo, and reduce incentives for money market arbitrage and market making.2 Reduced incentives for arbitrage and market making in turn affect market liquidity and can lead to greater periods of uncertainty. Furthermore, since European banks are required to report average month-end positions, there are increasing signs of market stress at month-end dates. The leverage ratio contains provisions for netting of offsetting cash positions when they are with the same counterparty and settled through the same system. This has resulted in a much greater use of central counterparties (CCPs). The use of CCPs has been strongly supported by authorities and brings benefits in terms of smooth market functioning, as well as for individual institutions. Eurosystem contacts report a wide difference in the pricing of trades cleared bilaterally and those cleared through CCPs – sometimes in the tens of basis points. CCPs, however, are also important for repo markets for a different reason. The increased volume of derivative trades centrally cleared at CCPs due to new regulations such as EMIR, as well as sporadic bouts of volatility, means that those institutions tend to hold significant quantities of cash. Placing that cash as unsecured deposits would represent wrong-way risk for CCPs as the collapse of a significant financial institution would create significant market volatility at the same time as potentially the loss of some of the unsecured deposits.