Survey reveals European repo market decline
11 March 2013 London
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The size of the European repo market declined 0.9 percent between June and December 2012, according to the European Repo Council of the International Capital Market Association鈥檚 (ICMA鈥檚) bi-annual survey.
The survey, which measured the amount of repo business outstanding on 12 December 2012, set the baseline figure for market size at 鈧�5.611 billion. This represented a 9.5 percent reduction of repo business since the December 2011 survey.
The European Repo Council鈥檚 survey is based on returns received from 71 financial institutions in Europe, and is a snapshot of the volume of repo trades outstanding on a single day in December 2012.
An analysis of a constant sample of survey respondents, using only the figures for the banks that participated in the last three surveys, revealed a decline in market size of 6.6 percent since June 2012 and an 11.9 percent year-on-year contraction.
鈥淐ontinued weakness in the market is thought to reflect the effect of the ECB鈥檚 (European Central Bank鈥檚) Long Term Refinancing Operations (LTRO) liquidity, which has meant that banks have been able to decrease their reliance on funding from repo operations in the market. However, the size of the market remains well above the trough recorded in the December 2008 survey (鈧�4,633 billion),鈥� said a statement from the council.
Godfried De Vidts, chairman of ICMA鈥檚 European Repo Council, said: 鈥淭he survey results demonstrate the continued existence of a robust European repo market; however the future of this market is in jeopardy. The European Commission鈥檚 latest proposal for Financial Transactions Tax (FTT) comes at a time when the Basel Committee has guided interbank lending transactions away from an unsecured to a secured basis and when wholesale market participants, together with the central bank community, have moved to the repo market because it is the safest way of distributing liquidity throughout the European banking system.鈥�
鈥淭he FTT proposals to tax repo transactions put the economic viability of repo, including triparty, transactions at significant risk, which will lead to less liquidity provision to the real economy.鈥�
In February, the European Commission set out the details of the FTT under enhanced cooperation.
The proposal, if adopted by the 11 member states that have agreed to it as drafted, could see a tax levied on equity, bond and derivatives trades as early as January 2014.
De Vidts added: 鈥淭he FTT proposals also put at risk the implementation of EMIR (European Market Infrastructure Regulation), which requires the use of collateral for centralised and bilateral clearing. As ESMA (European 麻豆传媒 and Markets Authority) highlighted upon release of its first EU securities markets risk report on 14 February: the collapse of unsecured markets during the financial crisis, as well as regulatory initiatives, have led market participants to rely increasingly on collateral as a means of mitigating counterparty risk, stimulating the demand for collateral. Additional demand for collateral will exceed the additional supply of collateral in 2013-2014, making collateral comparatively scarcer.鈥�
鈥淚f the FTT on repo transactions (which facilitate collateral being available where it is needed) goes ahead, the regulatory collateral crunch will actually materialise. Is that what we really want to happen?鈥�
The survey, which measured the amount of repo business outstanding on 12 December 2012, set the baseline figure for market size at 鈧�5.611 billion. This represented a 9.5 percent reduction of repo business since the December 2011 survey.
The European Repo Council鈥檚 survey is based on returns received from 71 financial institutions in Europe, and is a snapshot of the volume of repo trades outstanding on a single day in December 2012.
An analysis of a constant sample of survey respondents, using only the figures for the banks that participated in the last three surveys, revealed a decline in market size of 6.6 percent since June 2012 and an 11.9 percent year-on-year contraction.
鈥淐ontinued weakness in the market is thought to reflect the effect of the ECB鈥檚 (European Central Bank鈥檚) Long Term Refinancing Operations (LTRO) liquidity, which has meant that banks have been able to decrease their reliance on funding from repo operations in the market. However, the size of the market remains well above the trough recorded in the December 2008 survey (鈧�4,633 billion),鈥� said a statement from the council.
Godfried De Vidts, chairman of ICMA鈥檚 European Repo Council, said: 鈥淭he survey results demonstrate the continued existence of a robust European repo market; however the future of this market is in jeopardy. The European Commission鈥檚 latest proposal for Financial Transactions Tax (FTT) comes at a time when the Basel Committee has guided interbank lending transactions away from an unsecured to a secured basis and when wholesale market participants, together with the central bank community, have moved to the repo market because it is the safest way of distributing liquidity throughout the European banking system.鈥�
鈥淭he FTT proposals to tax repo transactions put the economic viability of repo, including triparty, transactions at significant risk, which will lead to less liquidity provision to the real economy.鈥�
In February, the European Commission set out the details of the FTT under enhanced cooperation.
The proposal, if adopted by the 11 member states that have agreed to it as drafted, could see a tax levied on equity, bond and derivatives trades as early as January 2014.
De Vidts added: 鈥淭he FTT proposals also put at risk the implementation of EMIR (European Market Infrastructure Regulation), which requires the use of collateral for centralised and bilateral clearing. As ESMA (European 麻豆传媒 and Markets Authority) highlighted upon release of its first EU securities markets risk report on 14 February: the collapse of unsecured markets during the financial crisis, as well as regulatory initiatives, have led market participants to rely increasingly on collateral as a means of mitigating counterparty risk, stimulating the demand for collateral. Additional demand for collateral will exceed the additional supply of collateral in 2013-2014, making collateral comparatively scarcer.鈥�
鈥淚f the FTT on repo transactions (which facilitate collateral being available where it is needed) goes ahead, the regulatory collateral crunch will actually materialise. Is that what we really want to happen?鈥�
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