A new survey released by the European Repo and Collateral Council (ERCC) of the International Capital Market Association (ICMA) has set the baseline figure for European market size at a record number of €7,250 billion, compared with the €6,455 billion in June 2017.
The ERCC suggested that this represents an increase in the ‘headline’ number since the last survey of 12.3 percent and 28.2 percent year-on-year.
The comparable figure for the first-ever survey in June 2001 was just €1.863 billion.
Using a constant sample of banks, it is estimated that the market grew 12.2 percent since June last year and 19.4 percent year-on-year. However, this growth was not broadly based across the survey sample.
According to the survey results, the uptrend in the share of directly negotiated repo, observed since 2012, continued between June and December last year, while the share of electronic business transacted over alternative trading systems (ATS) continued to contract.
Growth in the overall business reported directly by the principal ATS operating in Europe was muted, although this reflected very mixed fortunes among the ATS. The share of tri-party repo in the survey recovered but remained well below historic levels, according to the report.
Cross-border business with counterparties in non-eurozone countries continued to gain share, but the biggest gain was in domestic business, the trend decline in which may have bottomed out, comments the ERCC. These gains were largely reflected in a further fall in the share of anonymous (that is central counterparty-cleared) trading. The same pattern was seen in electronic trading, but reversed in tri-party.
The survey found that the value of outstanding repo business managed by the four tri-party agents who contributed directly to the survey fell.
The share and absolute value of general collateral financing touched new lows. But the share of transactions negotiated directly or via voice-brokers that were subsequently registered with a central counterparty (CCP) increased again.
The report showed that the biggest change in the currency composition of the survey was an exceptional increase in the share of Danish and Swedish currencies. It described activity in the pound sterling and Japanese yen as buoyant. There was a jump in the share of the Swiss franc in the business reported directly by ATS, reflecting the participation of SIX Repo in the survey for the first time.
The share of government bonds within the pool of EU-originated fixed-income collateral reported in the survey fell back, driven mainly by retreats by French, German and Italian government securities and rapid growth in non-government securities issued in Denmark and Sweden. US Treasuries lost share.
ATS reported significant increases in the shares of German, Spanish and UK government securities but a very sharp fall in Italian government securities. In triparty repo, most eurozone government securities lost ground to US Treasuries, JGBs, eurobonds and other Organisation for Economic Co-operation and Development securities.
Overall, the market as represented by the survey sample continues to be a net cash borrower in open repos and repos with one week or less remaining to maturity and a net lender in longer maturities, says the report. The share of short-dated positions dropped back in December, a typical end-year fluctuation. However, the weighted average term to maturity barely changed.
The smaller share of short dates reflected falls in the share of repos with one day and eight days to one month remaining. In contrast, open repos increased their share, as did repos with one to three months remaining and forward repos. The change in the share of repos with one to three months remaining is likely to have been driven by demand for high-quality liquid assets (HQLA) to meet regulatory reporting requirements at the end of the year. The increase in the share of forwards could reflect efforts by the market to manage end-year positions in advance in order to avoid seasonal pressures. In contrast to the main survey, there was a distinct lengthening of maturities in electronic trading reported directly by ATS.
Godfried De Vidts, ERCC chairman, said the survey showed strong growth as banks catch-up and release some balance sheet towards the real economy, or shadow banking world as mentioned in the most recent Financial Stability Board report.
De Vidts added: “Regulatory uncertainties before the implementation of net stable funding ratio, Central Securities Depositories Regulation and Securities Financing Transactions Reporting and the revision of bank resolution and recovery directive may hold back further expansion.”
“Quantitative easing) and shortages of HQLA continue to impact overall market fluidity, while banks and customers have been better prepared for year-end although International Capital Market Association’s research shows the gap between buy- and sell-side funding remained deep.”
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