European repo market growth continues
17 October 2018 London
Image: Shutterstock
The European repo market continues to grow, with the baseline market size at a record €7.4 billion, according to a recent survey by the European Repo and Collateral Council (ERCC) of the International Capital Market Association (ICMA).
The survey, which calculates the amount of repo business outstanding on 6 June 2018, from the returns of 62 offices of 59 financial groups, showed an increase from €7.3 billion in December last year to €7.4 billion in June this year.
These figures represent an increase of 13.9 percent since last year’s survey in June.
Commenting on the results of the survey, Godfried De Vidts, chair of ICMA’s ERCC, said: “The repo market continues to perform as a collateral source for prudential and regulatory requirements. Highly liquid, unencumbered flows of collateral already help to protect the CCP and bilateral hedging flows that are so crucial for the real economy."
He added: "Further mandatory clearing obligations for the buy-side will also need the repo market to deliver collateral. All-in-all, growth in repo activity is positive for global financial markets.”
The growth in repo business over the last two surveys is said to be down to the increased requirement for collateral to underpin financial transactions beginning to bite.
Post-crisis regulation mandated by the G20, according to ICMA, has pushed markets towards centralised clearing, with the associated higher margin commitments and more frequent margin calls creating huge collateral demands.
The sell side has already adopted this mandatory obligation while the buy side is being brought on board, with the final deadline in 2020.
The survey found that the increase in repo market size noted by the December 2017 survey and sustained in the first half of 2018, indicates that the market has adapted to a series of new regulations implemented in recent years and the business is growing, with more efficient collateral management delivering improved profitability for repo traders.
However, it showed evidence of this being a market under stress and it remains to be seen if further proposed regulations can be assimilated successfully.
It also found that the overall recovery in electronic trading suggests a recovery in interdealer business. However, triparty repo has not shared that recovery and its share of the survey sample fell back to 6 percent from 8.6 percent in December last year.
According to ICMA, this reflects the continued dampening effect of plentiful central bank liquidity on the need for market funding.
The survey, which calculates the amount of repo business outstanding on 6 June 2018, from the returns of 62 offices of 59 financial groups, showed an increase from €7.3 billion in December last year to €7.4 billion in June this year.
These figures represent an increase of 13.9 percent since last year’s survey in June.
Commenting on the results of the survey, Godfried De Vidts, chair of ICMA’s ERCC, said: “The repo market continues to perform as a collateral source for prudential and regulatory requirements. Highly liquid, unencumbered flows of collateral already help to protect the CCP and bilateral hedging flows that are so crucial for the real economy."
He added: "Further mandatory clearing obligations for the buy-side will also need the repo market to deliver collateral. All-in-all, growth in repo activity is positive for global financial markets.”
The growth in repo business over the last two surveys is said to be down to the increased requirement for collateral to underpin financial transactions beginning to bite.
Post-crisis regulation mandated by the G20, according to ICMA, has pushed markets towards centralised clearing, with the associated higher margin commitments and more frequent margin calls creating huge collateral demands.
The sell side has already adopted this mandatory obligation while the buy side is being brought on board, with the final deadline in 2020.
The survey found that the increase in repo market size noted by the December 2017 survey and sustained in the first half of 2018, indicates that the market has adapted to a series of new regulations implemented in recent years and the business is growing, with more efficient collateral management delivering improved profitability for repo traders.
However, it showed evidence of this being a market under stress and it remains to be seen if further proposed regulations can be assimilated successfully.
It also found that the overall recovery in electronic trading suggests a recovery in interdealer business. However, triparty repo has not shared that recovery and its share of the survey sample fell back to 6 percent from 8.6 percent in December last year.
According to ICMA, this reflects the continued dampening effect of plentiful central bank liquidity on the need for market funding.
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