An expansion of the ECB’s securities lending programme to include its covered bond holdings is “a step in the right direction” that could improve liquidity in the market, according to an analyst, but others said the impact will likely be limited in spite of a lowering of the lending fee.

The European Central Bank’s securities markets programme (SMP) – which is implemented by lending agent Deutsche Bank – is aimed at primary dealers of euro area sovereign bonds and at other institutions with market-making commitments, with the aim of supporting secondary market liquidity.

The ECB has made holdings purchased under its Public Sector Purchase Programme (PSPP) available for the securities lending scheme since 2 April 2015, a month after PSPP buying began.

The ECB announced that as of this Monday (4 April), holdings purchased by the ECB under its three covered bond purchase programmes are also being made available for lending via the SMP.

According to the terms of the programme, subject to availability, an individual counterparty may borrow up to 2.5% of the amount outstanding of a single issue, with a maximum of Eu200m for any such issue.

The ECB’s covered bond holdings, as well as those of national central banks, were previously available for lending outside the programme.

“In our view, adding covered bonds to the ECB’s securities lending scheme can clearly be a step in the right direction to mitigate some of the negative impact the Eurosystem’s QE has had on covered bond secondary market liquidity,” said Florian Eichert, head of covered bond and SSA research at Crédit Agricole.

Eichert said it is particularly positive that there is not a maximum tenor limit for the trades, meaning longer term covered bond securities lending is possible.

He also noted that, while there is no fixed time limit on extending a borrowing transaction under the SMP, the ECB says it monitors loans with a duration of more than 30 calendar days to ensure that the facility is being used for its intended purpose of supporting secondary market liquidity.

“Liquidity in a Eu500m-Eu750m bond is clearly different from a Eu5bn KFW or a large sovereign bond,” he said. “Consequently, giving traders more time to cover shorts and redeliver bonds to the ECB is crucial in covered bond markets.

“We clearly say it is only a step though, as merely setting rules is one thing; traders also need to become comfortable with the system and the ECB’s willingness to see this as a means to support liquidity and not just a short term fail mitigating system.”

Another analyst, however, said he does not expect the addition of covered bonds to the SMP to make a substantial difference.

The ECB also from Monday reduced the fee that counterparties must pay to borrow under the SMP, from a fixed fee of 40bp to either a fixed minimum fee of 30bp or a fee based on prevailing market rates, whichever is the higher.

Analysts said the rate remained expensive, however.

“While yesterday’s decision might ease somewhat the bond scarcity in repo markets,” said Martin van Vliet, senior interest rate strategist at ING, “it is certainly no game-changer in our view as the fee remains punitive compared with that charged by the Fed and BoE for securities lending.”

Whereas the Eurosystem publishes a list of ISINs held under the PSPP/SMP on a weekly basis, the covered bond holdings will not be made public. The ECB said information on the availability of CBPP holdings can be obtained directly from Deutsche, as the securities lending agent.