ECB liquidity inspires drop in European repo
23 January 2014 London
Image: Shutterstock
There has been a sharp drop-off in the size of the European repo market since June 2013, said a recent survey.
The European Repo Council of the International Capital Market Association (ICMA) calculated the amount of repo business outstanding on 11 December 2013, setting the baseline figure for market size at 鈧�5.5 trillion.
This represents a sharp decline in market size from the figure of 鈧�6.1 trillion recorded in the last survey in June 2013. Using a constant sample of banks in both surveys, it is estimated that that the market has shrunk by at least 8.2 percent since June.
But, the latest figure for repo market size is still substantially above the lowest survey figure of 鈧�4.6 trillion recorded in December 2008, although well short of the pre-crisis peak in European repo market size of 鈧�6.8 trillion in June 2007.
The author of the survey, Richard Comotto of the ICMA Centre, University of Reading, said: 鈥淭he contraction of the market would seem to be the result of the usual shrinkage of repo books at year-end plus the impact of the liquidity offered by the European Central Bank in December in order to relieve any seasonal funding shortages. It may also have been driven by the anticipation of future regulatory constraints on short-term wholesale funding.鈥�
Godfried De Vidts, chairman of ICMA鈥檚 European Repo Council, said that the repo market still faces an unclear landscape. The impact of regulatory reforms and interactions with the central bank community continue to increase uncertainty. Market users need to be alert to changing market forces, including the increased use of collateral while the introduction of mandatory clearing for OTC derivatives is taking place.鈥�
Other findings of the survey showed that the share of directly-negotiated repo business continued to rise to 53.2 percent of the survey total; this gain in market share was at the expense of the electronic trading of repos which fell to 31.7 percent of the survey.
Data provided directly by the principal automatic trading systems showed that the outstanding value of all electronic trading (not just the institutions in the survey sample) also contracted.
The market share of triparty repo business improved slightly to 9.9 percent from 9.6 percent in the previous survey. However, the outstanding value of triparty repo reported directly by the major triparty agents in Europe reached a record figure of 鈧�1.3 trillion (22 percent).
鈥淭his points to a further expansion of the repo market outside the survey sample, which is mainly repo dealers, supporting anecdotal evidence of new kinds of customer adopting triparty as a means of accessing the repo market,鈥� said a statement from the ICMA.
It may also reflect renewed interest in lending to core eurozone banks by external investors such as US money market mutual funds.
There was a drop it the share of domestic business in the survey to 26.1 percent, this was probably the result of central bank assistance in December reducing the need for trading within eurozone countries.
There was increase in the share of CCP-cleared trading since the last survey to 25 percent of the survey sample, 鈥渃ontrary to reports suggesting that banks were shifting out of CCP-cleared trading to take advantage of smaller haircuts in the uncleared market鈥�.
鈥淗owever, the picture is confused by a change in the questions asked about CCP-cleared trading and is anyway complicated (eg, Spanish banks may have been reducing their use of CCPs but Italian have had to increase their use).鈥�
The European Repo Council of the International Capital Market Association (ICMA) calculated the amount of repo business outstanding on 11 December 2013, setting the baseline figure for market size at 鈧�5.5 trillion.
This represents a sharp decline in market size from the figure of 鈧�6.1 trillion recorded in the last survey in June 2013. Using a constant sample of banks in both surveys, it is estimated that that the market has shrunk by at least 8.2 percent since June.
But, the latest figure for repo market size is still substantially above the lowest survey figure of 鈧�4.6 trillion recorded in December 2008, although well short of the pre-crisis peak in European repo market size of 鈧�6.8 trillion in June 2007.
The author of the survey, Richard Comotto of the ICMA Centre, University of Reading, said: 鈥淭he contraction of the market would seem to be the result of the usual shrinkage of repo books at year-end plus the impact of the liquidity offered by the European Central Bank in December in order to relieve any seasonal funding shortages. It may also have been driven by the anticipation of future regulatory constraints on short-term wholesale funding.鈥�
Godfried De Vidts, chairman of ICMA鈥檚 European Repo Council, said that the repo market still faces an unclear landscape. The impact of regulatory reforms and interactions with the central bank community continue to increase uncertainty. Market users need to be alert to changing market forces, including the increased use of collateral while the introduction of mandatory clearing for OTC derivatives is taking place.鈥�
Other findings of the survey showed that the share of directly-negotiated repo business continued to rise to 53.2 percent of the survey total; this gain in market share was at the expense of the electronic trading of repos which fell to 31.7 percent of the survey.
Data provided directly by the principal automatic trading systems showed that the outstanding value of all electronic trading (not just the institutions in the survey sample) also contracted.
The market share of triparty repo business improved slightly to 9.9 percent from 9.6 percent in the previous survey. However, the outstanding value of triparty repo reported directly by the major triparty agents in Europe reached a record figure of 鈧�1.3 trillion (22 percent).
鈥淭his points to a further expansion of the repo market outside the survey sample, which is mainly repo dealers, supporting anecdotal evidence of new kinds of customer adopting triparty as a means of accessing the repo market,鈥� said a statement from the ICMA.
It may also reflect renewed interest in lending to core eurozone banks by external investors such as US money market mutual funds.
There was a drop it the share of domestic business in the survey to 26.1 percent, this was probably the result of central bank assistance in December reducing the need for trading within eurozone countries.
There was increase in the share of CCP-cleared trading since the last survey to 25 percent of the survey sample, 鈥渃ontrary to reports suggesting that banks were shifting out of CCP-cleared trading to take advantage of smaller haircuts in the uncleared market鈥�.
鈥淗owever, the picture is confused by a change in the questions asked about CCP-cleared trading and is anyway complicated (eg, Spanish banks may have been reducing their use of CCPs but Italian have had to increase their use).鈥�
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