Icma

What Is ICMA?

The International Capital Market Association (ICMA) is a not-for-profit global trade association for participants in the debt capital markets. It operates within the broader sphere of capital markets regulation, fostering well-functioning international and globally coherent cross-border debt securities markets. ICMA provides industry-driven standards, guidelines, and recommendations for issuance, trading, and settlement in international fixed income instruments. The association works closely with regulatory and governmental authorities to ensure that financial regulation supports stable and efficient capital markets. ICMA represents a diverse membership including private and public sector issuers, banks, securities houses, asset managers, and other investors.

History and Origin

ICMA's roots trace back to the early 1960s with the emergence of the Eurobond market. The rapid growth of offshore borrowing in U.S. dollars, designed to circumvent U.S. tax regulations, quickly highlighted challenges related to cross-jurisdictional settlement and regulation. In response to a settlement crisis in this nascent market, the Association of International Bond Dealers (AIBD) was established in Zurich in February 1969 by a group of bond dealers representing banks and securities firms. AIBD introduced rules and recommendations for market practice, aiming to bring stability and order to the international capital market.

Over the years, AIBD expanded its services, including providing market data and launching a transaction matching and regulatory reporting system known as TRAX in 1989. In 1992, AIBD rebranded itself as the International Securities Market Association (ISMA). Concurrently, the International Primary Market Association (IPMA) was founded in 1984 by major banks to provide recommendations for the primary market. In July 2005, ISMA and IPMA merged, forming the International Capital Market Association (ICMA) to encompass both primary and secondary market activities in international capital markets.,⁹

Key Takeaways

• ICMA is a global trade association promoting well-functioning international debt securities markets through industry standards and recommendations.
• It originated as the Association of International Bond Dealers (AIBD) in 1969 to address issues in the Eurobond market.
• ICMA plays a crucial role in developing standard legal documentation, such as the Global Master Repurchase Agreement (GMRA), for cross-border transactions.
• The association focuses on key areas including primary and secondary markets, repurchase agreements (repo) and collateral, and sustainable finance.
• ICMA is actively involved in dialogue with regulatory authorities to shape financial regulation that supports market efficiency.

Formula and Calculation

While ICMA itself does not have a single overarching formula, it plays a critical role in standardizing methodologies used in financial calculations, particularly concerning fixed income instruments. One notable area is the day count convention, a method for calculating the number of days between two dates for interest accrual purposes. ICMA is associated with the "Actual/Actual (ICMA)" day count convention, which is widely used in the bond market.⁸

The Actual/Actual (ICMA) day count convention calculates the interest for an interest period by dividing the actual number of days in the period by the actual number of days in the corresponding coupon period, multiplied by the annual coupon rate and the principal amount. For irregular coupon periods, the convention requires dividing the period into quasi-coupon periods that match the normal frequency of payment dates.

The general formula for interest accrued using the Actual/Actual (ICMA) convention is:

Where:

• (\text{Principal}) = The face value of the bond or loan.
• (\text{Coupon Rate}) = The annual interest rate of the bond.
• (\text{Actual Days in Period}) = The actual number of days for which interest is being calculated.
• (\text{Actual Days in Coupon Period}) = The actual number of days in the current coupon period.

This formula ensures consistent interest payments and equal valuation of all days within a coupon period, even if it falls across a leap year.

Interpreting the ICMA

ICMA is not a metric to be interpreted but rather an influential body that shapes market practices and regulatory discourse within the international debt capital markets. Its standards and recommendations are widely adopted by market participants, signifying their commitment to established best practices and orderly market functioning. The existence and active engagement of ICMA indicate a collective industry effort towards self-regulation and the promotion of market integrity.

When market participants adhere to ICMA guidelines, it implies a level of standardization and transparency in their operations, which can contribute to greater market efficiency and reduced counterparty risk. For example, the widespread use of the Global Master Repurchase Agreement (GMRA) drafted under ICMA's auspices means that market participants engaging in repurchase agreements are operating under a legally robust and recognized framework. This reduces legal uncertainty and facilitates cross-border transactions.

Hypothetical Example

Consider a hypothetical scenario involving two financial institutions, "Alpha Bank" and "Beta Securities," engaging in a cross-border repurchase agreement. Alpha Bank wants to borrow cash from Beta Securities for a short period, offering sovereign securities as collateral.

To execute this transaction, both parties agree to use the Global Master Repurchase Agreement (GMRA), a standardized legal agreement widely recognized and promoted by ICMA. By utilizing the GMRA, Alpha Bank and Beta Securities leverage a pre-established framework that defines the terms of the repo transaction, including:

1. Definitions: Clear definitions for terms like "repurchase date," "repo rate," and "margin maintenance."
2. Rights and Obligations: Detailed outline of each party's rights and obligations, including the right to re-use collateral and the obligation to deliver securities.
3. Default Provisions: Standardized procedures in case of a default by either party, including close-out netting provisions.

If, for instance, the repo period spans from March 1st to March 15th in a non-leap year, and the annual repo rate is 4% on a principal of $1,000,000, the interest calculation might utilize the Actual/Actual (ICMA) day count convention. The "Actual Days in Period" would be 14 days, and the "Actual Days in Coupon Period" (assuming a standard annual coupon period for simplicity, or adjusted for the actual days in a quarter/semi-annual period if the underlying bond has such frequency) would be 365. The accrued interest would be calculated as:

(\text{Accrued Interest} = $1,000,000 \times 0.04 \times \frac{14}{365} \approx $1,534.25)

This ensures that both parties understand and agree on the precise method for calculating the interest on the repo transaction, reducing ambiguity and operational risk.

Practical Applications

ICMA's influence extends across various facets of the financial industry:

• Standardization of Market Practices: ICMA develops and promotes industry-driven standards and recommendations for the issuance, trading, and settlement of international bonds and other debt instruments. This helps ensure uniformity and efficiency in cross-border transactions.
• Repo and Collateral Markets: ICMA has played a significant role in developing the international repurchase agreement (repo) market, particularly through the promulgation of the Global Master Repurchase Agreement (GMRA). The GMRA has become the principal master agreement for cross-border repos globally, facilitating liquidity and risk management.⁷
• Sustainable Finance: Since 2014, ICMA has provided the Secretariat for the Green Bond Principles (GBP), Social Bond Principles (SBP), Sustainability Bond Guidelines (SBG), and Sustainability-Linked Bond Principles (SLBP). These principles underpin the global sustainable bond market, guiding issuers and investors in this growing segment.⁶
• Regulatory Dialogue and Advocacy: ICMA engages extensively with regulatory and governmental authorities worldwide. It provides industry insights and helps shape financial regulation to ensure it supports the efficiency and cost-effectiveness of the capital markets.

Limitations and Criticisms

While industry self-regulation, as exemplified by organizations like ICMA, offers numerous benefits, it also faces certain limitations and criticisms. A primary concern is the potential for conflicts of interest, where self-regulatory bodies might prioritize the interests of their members over broader public or market integrity objectives.⁵ This can lead to rules that favor incumbent firms or stifle competition.

Another challenge is the "free-rider" problem, where firms that do not participate in the self-regulatory scheme can benefit from the improved market conditions without incurring the costs of compliance or membership.⁴ Furthermore, less ethical actors might join self-regulatory organizations to mask poor performance, undermining the system's credibility.³

Some critics argue that self-regulatory organizations might lack the necessary enforcement powers or independence compared to government regulators, potentially leading to less stringent oversight. While ICMA works closely with regulatory bodies, the ultimate authority for market oversight often rests with national or supranational governmental agencies. However, it is also acknowledged that these issues are not unique to self-regulation and can exist within government-regulated industries as well, often stemming from institutional design flaws.²

ICMA vs. ISDA

ICMA (International Capital Market Association) and ISDA (International Swaps and Derivatives Association) are both prominent trade associations in global financial markets, but they focus on different segments and types of instruments.

While ICMA primarily deals with securities and cash markets, especially fixed income products like bonds and repurchase agreements, ISDA concentrates on the standardization of documentation and practices for the vast and complex over-the-counter (OTC) derivatives market. Confusion can arise because both organizations contribute to standard financial conventions, such as day count conventions, and their predecessor organizations (ISMA, now part of ICMA) sometimes had similar naming conventions for these. However, they serve distinct, albeit sometimes overlapping, areas of the financial landscape.¹

FAQs

What is the main purpose of ICMA?

ICMA's main purpose is to promote resilient and well-functioning international and globally coherent cross-border debt capital markets through industry-driven standards, recommendations, and dialogue with regulatory authorities.

Is ICMA a regulator?

ICMA is a trade association, not a government regulator. It provides a framework of rules and recommendations for market participants, effectively promoting industry self-regulation and best practices. While it works closely with official regulators, it does not have statutory regulatory authority itself.

What is the Global Master Repurchase Agreement (GMRA)?

The Global Master Repurchase Agreement (GMRA) is a standardized legal agreement widely used in the international repurchase agreement (repo) market. It was developed under the auspices of ICMA and provides a common legal framework for participants engaging in cross-border repo transactions, enhancing clarity and reducing risk.

How does ICMA contribute to sustainable finance?

ICMA serves as the Secretariat for key principles that underpin the global sustainable bond market, including the Green Bond Principles (GBP) and Social Bond Principles (SBP). It helps guide issuers and investors in developing and participating in sustainable finance activities.