ICMA: European Repo Market Resilient

The European Repo Council of the International Capital Market Association (ICMA) said that the European repo market has “resumed its gradual trend back to normality” as banks reduce their reliance on central bank liquidity.

ICMA has just released its 27th semi-annual survey of the European repo market. The survey, which computes the amount of repo business outstanding on 11 June 2014, sets the baseline figure for market size at €5,782bn, marking a small decline from the €6,076bn recorded in June 2013 but a recovery from the essentially seasonal decline seen in December 2013.

“As repo markets are exposed to many regulatory initiatives the latest repo survey remains the most valuable tool to measure the health of this market,” said Godfried De Vidts, Chairman of ICMA’s European Repo Council. “While policy makers turn their attention to growth, it is of utmost importance to take into account potential counterproductive regulatory initiatives that risk curtailing the liquidity and fluidity of collateral, the basic ingredient of the repo market.

“Basel measures expressed in the new liquidity ratios, and regulatory initiatives such as the Financial Stability Board’s [FSB] shadow banking workstream on securities financing transactions (SFTs), to be followed by Europe’s SFT regulation should be looked at in the wider context of markets reform.

“New EU trading (Markets in Financial Instruments Directive [MiFID]), clearing (European Market Infrastructure Regulation [EMIR]) and settlement (Central Securities Depositories [CSDR]) rules are initiatives that have a common denominator – what is liquid or illiquid collateral, which is clearly an issue that is best understood when looking at repo financing.

“Along with the survey, we are also providing a briefing on developing more efficient and effective collateral markets, which shows the ERC’s commitment to continue to guide the repo markets in providing finance to the real economy. We welcome deeper involvement with the regulatory authorities.”

Key findings of the survey:

  • A rebound in market growth in H114 after a sharp fall in H213. The latter was due to the trimming of repo books at year-end for balance sheet reasons and special European Central Bank (ECB) assistance to relieve seasonal shortages, which displaced the need for market funding. So the underlying market trend appears to be upward, albeit at a modest rate.
  • The growth in European repo may also be a sign of continuing normalisation of financial markets. Reduced reliance on the ECB, reflected in lower liquidity surpluses and repayments of the 3-year long-term refinancing operations (LTROs), is forcing banks back into market. This has been evidenced by tighter funding conditions.
  • Growing investor confidence in Italy, Spain and other eurozone peripherals was reflected in their larger share of the repo market, at the expense of core eurozone collateral.
  • Electronic trading, particularly central counterparty (CCP)-cleared trading, continued to increase share (largely at the expense of voice-brokers) and reached record levels.
  • The expansion of the European repo market would appear to be at odds with reports of several US banks and European banks with large US operations contracting their repo activity during the first half of the year.

 

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