18 October 2017
Reporter: Drew Nicol

Repo steps back from the brink

The European repo market may be recovering from the severe lack of liquidity experienced at year end 2016, according the International Capital Market Association (ICMA).

In its latest repo report, ICMA’s European Repo and Collateral Council (ERCC) noted that the market had experienced a 6.4 percent bump in repo business outstanding as of 7 June, compared to December 2016.

“This growth is broadly based across the survey and reflects the usual seasonal recovery from December to June, but may indicate that the European repo market is recovering from the severe lack of liquidity experienced at year end 2016,” explained the council in its report on the survey.

Demand for high-quality liquid assets, which was a feature of the last survey, remains an important driver of repo business, given the continuing growth in the already large share of government bonds in both the survey and in directly-reported triparty repo, albeit not to the same degree as in December.

The survey also found that cross-border business with counterparties in non-eurozone countries continued to grow at the expense of the market share of anonymous, meaning central counterparty-cleared, trading and cross-border business with counterparties in the eurozone.

ICMA noted that the non-eurozone activity probably came from global investment banks based in London.

Cash-driven repo continues to suffer from the abundance of central bank liquidity injected by quantitative easing “with general collateral financing losing further market share and the absolute size of triparty repo stagnating”.

Godfried De Vidts, chair of ICMA’s ERCC, said: “It is encouraging that the repo market shows some signs of recovery. Within the new financial regulatory framework, the importance of this short-term market towards stability is clear.”

“The flow of cash and collateral for use by sell- and buy-side participants allows, amongst many other uses, for the margining of centralised and bilateral clearing.”

He added: “After piling up new regulatory measures, some degree of balance has returned – not reversing what has been achieved, but adjusting it where unnecessary stress was created.”

“I am confident market participants and the regulatory community at large can find the right balance to deliver a near optimal short-term financing framework, contributing to a capital market union as envisaged by many.”

The quarterly survey asked financial institutions operating in a number of European financial centres for the value of the cash side of repo and reverse repo contracts still outstanding at close of business on 7 June.

The questionnaire also asked these institutions to analyse their business in terms of the currency, the type of counterparty, contract and repo rate, the remaining term to maturity, the method of settlement and the origin of the collateral.

Institutions were asked about securities lending and borrowing conducted on their repo desks.

The latest survey was completed by 64 offices of 60 financial groups. This is one less respondent than in previous survey. Five institutions dropped out of the survey, three rejoined and one joined for the first time.

The next survey is scheduled to take place on 6 December.

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