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Survey shows strong recovery in European repo market

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The European Repo Council of the International Capital Market Association has released a survey which sets the baseline figure for the European repo market size at EUR5,582bn, representing an increase of 14.7 per cent on the figure of EUR4,868bn for the previous survey in June 2009.

This latest survey shows robust overall growth in volumes in the second half of 2009, which confirms the tentative signs of recovery seen in June 2009.

The data also demonstrates the resilience of the European repo market, which largely continued to function during the financial crisis of 2008-09.

ICMA says the repo market provided a vital link between central banks and banks during the crisis, and a strong repo market will also be vital in the future if there is to be an orderly withdrawal by central banks of their exceptional liquidity support and a revival of bank lending to customers, as this will depend on the revival of interbank liquidity, for which repo is essential.

The ICMA survey also shows further evidence that the market has taken on board the lessons of the market crisis, with higher use of central counterparty clearing, the greater focus on netting generally and the reduction in undocumented transactions.

Godfried de Vidts, chairman of the ICMA’s European Repo Council, says: “The repo product is a key source of funding in the interbank market, allowing banks to finance lending to their customers and so supporting revival in the global economy, the evidence from the survey of continuing recovery in the market is therefore encouraging.”

The overall market share of electronic trading of repo fell back slightly to 27.5 per cent from a high of 28.5 per cent in June 2009, reflecting the fact that growth in this sector did not keep up with the growth in the overall market, much of which was in forward-start repo which is relatively little traded electronically.

Market share of anonymous electronic trading jumped from 14.5 per cent in June to 18.3 per cent in December 2009.
 
The share of government bonds used as collateral for repo transactions fell to 76 per cent from 81.2 per cent in the previous survey. This was largely due to a reduction in the use of UK government bonds as collateral to 7.7 per cent of the total business in the latest survey from 12.8 per cent in June 2009. 

The market share of forward repo (repo which settles in a longer time frame than next day settlement) increased to a record share of 11.3 per cent.
 
The level of undocumented repo transactions has dropped to an all time low of only 2.9 per cent.

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