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European repo market recovers as banks return to the market for funding, says ICMA survey

The European repo market stands at EUR6,076bn, according to a survey by the European Repo Council of the International Capital Market Association (ICMA).

 
This represents an increase of 8.6 per cent in the size of the market since the last survey in December 2012.
 
This recovery in the European repo market is in marked contrast to the contraction in the US repo market which was widely reported in July. The revival in repo activity in Europe appears to be driven by banks in the eurozone returning to the market for funding as they start to repay the exceptional assistance of over EUR1trn, provided to the market via the European Central Bank through the Long Term Refinancing Operations (LTRO) liquidity of December 2011 and February 2012. The LTRO repayments have contributed to tighter market conditions and a steepening money market yield curve. The higher rates and greater market confidence have attracted lenders away from the ECB deposit facility (which pays zero percent) and back into the market.
 
The survey also revealed that the market share of euro-denominated repo has recovered over the same six month period since December 2012, now comprising 64.8 per cent of the survey total, providing further evidence for the role of the LTRO repayments in promoting recovery in the European repo market.
 
Godfried De Vidts, chairman of ICMA’s European Repo Council, says: “The long running ICMA-ERC semi-annual survey has proven to be highly valuable as arguments around the repo markets have flared up in regulatory discussions of late. The ERC will publish shortly a view on how a more comprehensive gathering of data may be accomplished. Today’s survey shows a healthy market that provides cash/collateral liquidity between interbank market participants in a secured way as mandated by Basel. This in itself provides a much safer way of distributing liquidity, in contrast to unsecured lending where counterparties are 100 per cent exposed to each other. I hope the value of the repo product continues to be recognised while we engage with policy makers on the new framework as highlighted in the recent FSB report.”
 
Short-dated repos (one month or less to maturity) increased their share of business to 57.25 from 50.5 per cent in the last survey. This was mainly driven by terms between one week and one month, suggesting that the attraction was higher repo rates due to the steepening money market yield curve at maturities without too much risk.
 
Domestic business recovered market share (up to 30.7 per cent) at the expense of cross-border transactions with a counterparty outside the eurozone (down to 29.3 per cent), another possible indicator of a return towards normality. In periods of market tension, many domestically-focussed banks have switched to central bank facilities, whereas internationally-active banks have tended to retreat less from the market.
 
There was modest growth in electronic trading to 33.1 per cent of the surveyed repo business, but anonymous (CCP-cleared) electronic trading has increased to 94.1 per cent of this total. Two trends appear to have been at work: some banks (e.g. Spanish banks) have been able to return to the non-electronic non-CCP market, where haircuts are lower; while others (e.g. Italian banks) have been forced to rely more on CCP-cleared, largely electronic, repos.
 
Directly-negotiated repos continued to recover market share to 52.3 per cent of the surveyed amount, while voice-brokered business declined to 14.6 per cent, an all-time low for the survey. Tri-party repos retained a consistent market share of 9.6 per cent. The larger directly-negotiated business may reflect the ability of some banks to return to the non-electronic non-CCP market.
 
The repo books of 39 out of the survey sample of 65 institutions expanded in the current survey.

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