ICMA’s European Repo Council Outlines Best Practice for Repo Market

The International Capital Market Association’s (ICMA) European Repo Council (ERC) has updated its guide to best practice in the European repurchase agreement (repo) market, setting out standards for the orderly trading and settlement of repos.

ICMA said that much repo trading in Europe is between banks in different countries, making it essential to have consistent, internationally-recognised standards.

In a repo transaction, one party sells an asset (usually fixed-income securities) to another party at one price at the start of the transaction and commits to repurchase the asset from the second party at a different price at a future date. By this means, the first party borrows money for the intervening period and the second party invests against collateral.

The security offered by repo has made it an essential interbank funding tool, which is reflected in the growth of the repo market in Europe over the past 20 years. Although impacted by the effect of the crisis on general financial activity, the latest threshold figure for market size is €5.5 trillion. Recent regulatory initiatives encouraging the collateralisation of risk, directly and through the use of central counterparties (CCPs), have further heightened the importance of the repo market as the place where collateral demand and supply meet.

The updated ERC guide covers the full scope of the repo trading life cycle including: fixing dates, affirmation and confirmation of transactions, margining, non-standard interest calculations, issuing notices, delivery issues and dealing with negative repo rates.

“The repo market proved uniquely resilient over the course of the financial crisis, in part, because of the high standards that market participants maintained in the way they conducted their business and settled issues, even under very difficult circumstances,” said ICMA ERC chairman, Godfried De Vidts.

“They were supported by a robust legal agreement in the form of the global master repurchase agreement [GMRA] and recommendations on best practice that had been distilled from practical experience over many years. The new guide updates and considerably expands those recommendations, to take account of recent experience.

“As change in the market shows no sign of slowing down, the new guide will inevitably have to change as well. It is therefore very much a ‘living’ document, which will be continually adapted to evolving market conditions.”

Martin Scheck, ICMA chief executive (CEO), added: “ICMA members and market participants are using our repo guidelines and documentation every working day, their acceptance and use extends beyond Europe to markets like Russia and Asia where repo is a fast developing component of the financial landscape.”

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