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Corrected money markets banks forgo chance to swap 3 yr cash, rates rise

(Corrects garbled spelling throughout)* Banks take up only 3.7 bln euros in 3-month funds* Shows banks not swapping 3-yr loans for short-term funds* Rise in short-term rates overdone, some analysts sayBy Emelia Sithole-MatariseLONDON, Jan 30 Money market rates marched higher on Wednesday after banks passed up twin opportunities this week to replace three-year loans with shorter-term funds, fostering concerns excess cash may start dwindling faster than predicted. Banks took up only 3.7 billion euros of three-month funds at the European Central Bank's financing operation on Wednesday, less than half the 10 billion average forecast in a Reuters poll. On Tuesday, they rolled over slightly less than 125 billion euros in seven-day funds at the ECB's weekly tender. The lack of a pickup in demand at both operations signaling that banks were not simply shifting the 137 billion euro in three-year loans they repay on Wednesday into shorter-dated funds. Many in the market see this as a sign of healing in parts of the crisis-hit euro zone banking sector but lessening cash in the system means monetary conditions are effectively tightened, pushing short-term money market rates up.

The results of the twin ECB tenders and the initial repayment of the ECB's three-year long-term refinancing operation (LTRO) leave about 500 billion euros of excess liquidity in the banking system. While this is still quite ample and will keep key overnight Eonia bank rate around current record lows, uncertainty over how much excess cash will be drained from the system as banks repay the three-year funds weekly has jacked up wholesale bank funding prices."The market is pricing the scenario of big repayments, a reduction in liquidity surplus and a tightening of liquidity conditions. So the big repayment announced last week and this week's tenders supported such expectations," said Giuseppe Maraffino, a strategist with Barclays Capital."Markets now will be very sensitive to the weekly repayments and all data on liquidity conditions, but I don't expect Ionia fixing to be significantly affected by the three-year LTRO repayments so I don't expect it to go up as the market is pricing now," he said.

Overnight Eonia forward contracts, which lock in an overnight borrowing rate over a longer period, remained under pressure. One-year Eonia rose as high as 0.25 percent from around 0.23 percent before the results of the ECB three-month tender. Bank-to-bank Euribor lending rates fixed at 0.23 percent from 0.226 percent, with equivalent Libor rates also edging higher, while Euribor futures <0#FEI:> pointed to higher rates from the end of 2013 out to 2017. Wholesale bank funding prices have been rising since the announcement on Friday that banks would repay this week a higher than forecast 137 billion euro of the three-year loans that the ECB said averted a credit crunch in late 2011 and early 2012.

CUTTING POSITIONS Stabilising euro zone markets and the perception the ECB was starting to tighten monetary conditions while other major banks such as the Federal Reserve and the Bank of Japan were still pump-priming, has also buoyed the euro, which spiked to a 14-month peak of $1.3563 on Wednesday."There's some unwinding of trades which were in play before the start of the year, possibly positioning for a rate cut and very dovish monetary policy so they have to cut their position," said Patrick Jacq, a strategist at BNP Paribas in Paris."And we probably have some speculative flows now betting on a more hawkish monetary stance which to me doesn't make any sense but in the near term this is the bias and there could be a correction at some stage."Jacq, Maraffino and other analysts reckon, however, that the rise in money market rates seemed overdone, particularly with excess liquidity still expected to remain ample enough to temper a sharp rise. Historically, money market rates only tend to move freely once the cash surplus drops below 200 billion euros, a scenario largely viewed as unlikely with banks expected to repay a total of 300 billion euros of the three-year funds this year. Money market rates effectively determine what interest rates banks charge firms and consumers and a sudden spike in rates could put unwanted stress on the euro zone's fragile economic recovery. The latest ECB survey showed that banks made it harder for firms to borrow in the fourth quarter and expect to tighten loan requirements further in coming months even though their own funding constraints have eased. (Chris Pizzey, London MPG Desk, +44; 0; 207 542-4441)

Islamic finance sets sights on centralized sharia boards

A global body for Islamic finance is developing a standard for centralized sharia boards to provide guidance for strengthening corporate governance and increasing the consumer appeal of sharia-compliant financial products. The move is the clearest indication yet that the industry is shifting away from self-regulation, an approach which proved flexible in its early years but which is now regarded as an obstacle to further growth. A standard on centralized sharia boards is one of the main themes covered at the annual conference of the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), being held in Manama this week. AAOIFI is conducting a preliminary study drawing on the experience of countries that have already implemented centralized sharia boards, the Bahrain-based body said in a statement ahead of the event. The new standard could be ready by early next year, according to Farrukh Raza, a board member of AAOIFI's board of governance and ethics and managing director of Islamic finance consultancy IFAAS. Central sharia boards could improve the take-up of Islamic financial products and address differing approaches across institutions, some of which have been regarded as liberal, Raza said on the sidelines of the conference.

Islamic banks have traditionally established their own internal sharia boards, employing scholars to rule on whether their products are religiously permissible. This has spawned divergent practices among Islamic banks, making it difficult to develop homogeneous transactions that are cheap and quick to structure. The approach is also prone to criticism of conflicts of interest, something the industry can ill-afford at a time when it wants to tap a wider audience beyond its core base of religiously-sensitive customers.

In a centralized model, a national body such as a central bank or capital market regulator establishes a sharia board that is independent from financial institutions. This body can provide both guidance and oversight, and serve as an arbitrator providing final rulings in the event of disputes among sharia boards of Islamic banks. The centralized model is increasingly being adopted across the industry, with Oman and Bahrain having established national sharia boards in the past year. The United Arab Emirates and newcomer Kenya have also proposed setting up similar bodies.

Malaysia, Indonesia and Pakistan have centralized sharia boards, but the way in which they operate can vary. The new standard aims to help define those roles and responsibilities, addressing issues such as optimal board composition, fit and proper criteria of scholars, as well as enforceability of rulings. The work comes a year after AAOIFI revamped its internal structure by appointing 50 members across three technical boards, which included the creation of the board on governance and ethics. ; var median = (relatedItemsTotal / 2); var $relatedContentGroupOne = $(' ul'); var $relatedContentGroupTwo = $(' ul'); $.each($relatedItems, function(k,v) { if (k + 1 = median) { $relatedContentGroupOne.append($relatedItems[k]); } else { $relatedContentGroupTwo.append($relatedItems[k]); } }); } else { $('.third-article-divide').append($('div class="related-content group-one"h3 class="related-content-title"Also In Big Story 10/h3ul/ul/div')); $('.related-content ul').append($relatedItems); } },500); } Next In Big Story 10 U.S. crude oil stocks fall 7.4 million bbls: API NEW YORK, Jan 4 U.S. crude stocks tumbled during the final week of 2016, while gasoline and distillate inventories surged, the American Petroleum Institute, a trade organization, said Wednesday. China's State Grid asks Brazil to speed up power line license: source SAO PAULO State Grid Corp of China [STGRD. UL] has asked the Brazilian government and regulators to speed up environmental licensing of a planned power line connecting to the Belo Monte dam in the Amazon forest, according to official documents and a source with direct knowledge of the matter. Lebanese newspaper closes after 42 years, hit by financial woes BEIRUT Lebanese daily newspaper As-Safir printed its final edition on Saturday, forced to close after 42 years because of financial problems as other news outlets in the country face similar difficulties. MORE FROM REUTERS window._taboola = window._taboola || []; _taboola.push({ mode: 'organic-thumbnails-a', container: 'taboola-recirc', placement: 'Below Article Thumbnails - Organic', target_type: 'mix' }); Sponsored Content @media(max-this site) { #mod-bizdev-dianomi{ height: 320px; } } From Around the Web Promoted by Taboola window._taboola = window._taboola || []; _taboola.push( { mode: 'thumbnails-3X2', container: 'taboola-below-article-thumbnails', placement: 'Below Article Thumbnails', target_type: 'mix' } ); window._taboola = window._taboola || []; _taboola.push