Growth recorded for European repo market
04 September 2014 London
Image: Shutterstock
The baseline figure for the European repo market has been set at €5,782 billion, according to the 27th semi annual survey by the European Repo Council (ERC) of the International Capital Market Association (ICMA).
The survey computes the amount of repo business outstanding on 11 June 2014 and, overall, the market has resumed its gradual trend back to normality as banks reduce their reliance on central bank liquidity.
Godfried de Vidts, chairman of ICMA’s ERC, said: “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.”
The recovery of the European repo market contrasts with recent reports of cuts in repo books by US banks during the first half of 2014. The contrast reflects the structural differences between the two markets, with European markets relying less on repo and being subjected to less regulation than the US counterparts.
The growth in Europe also distinguishes between the two markets where they are in the cycle in terms of recovery from the global financial crisis. The increase in European repo suggests recovery in the market.
Electronic trading, particularly central counterparty-cleared trading, continues to increase share and reached record levels, reflecting, in part, the growing repo activity in Italian collateral and a shortening of maturities.
Banks choosing shorter maturities shows that, with suck low market rates and little prospect of imminent rate rises in the Eurozone, there is no advantage in taking extra risk by investing for longer terms.
De Vidts adds: “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.”
However, despite low regulation now, there is a prospect of new regulation that could affect the market.
De Vidts explains: “Basel measures expressed in the new liquidity ratios, and regulatory initiatives such as the Financial Stability Board’s shadow banking work stream on Securities Financing Transactions (STFs), 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), clearing (European Market Infrastructure Regulation) and settlement (Central Securities Depository Regulation) 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.”
The survey computes the amount of repo business outstanding on 11 June 2014 and, overall, the market has resumed its gradual trend back to normality as banks reduce their reliance on central bank liquidity.
Godfried de Vidts, chairman of ICMA’s ERC, said: “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.”
The recovery of the European repo market contrasts with recent reports of cuts in repo books by US banks during the first half of 2014. The contrast reflects the structural differences between the two markets, with European markets relying less on repo and being subjected to less regulation than the US counterparts.
The growth in Europe also distinguishes between the two markets where they are in the cycle in terms of recovery from the global financial crisis. The increase in European repo suggests recovery in the market.
Electronic trading, particularly central counterparty-cleared trading, continues to increase share and reached record levels, reflecting, in part, the growing repo activity in Italian collateral and a shortening of maturities.
Banks choosing shorter maturities shows that, with suck low market rates and little prospect of imminent rate rises in the Eurozone, there is no advantage in taking extra risk by investing for longer terms.
De Vidts adds: “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.”
However, despite low regulation now, there is a prospect of new regulation that could affect the market.
De Vidts explains: “Basel measures expressed in the new liquidity ratios, and regulatory initiatives such as the Financial Stability Board’s shadow banking work stream on Securities Financing Transactions (STFs), 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), clearing (European Market Infrastructure Regulation) and settlement (Central Securities Depository Regulation) 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.”
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