Opportunities remain for repo despite widespread concerns

The repo market can still have a positive future despite facing a number of regulatory and liquidity challenges a panel of industry experts has said.

Speaking at Clearstream’s GSF Summit in Luxembourg, the repo financing panel remained optimistic about the repo market amid concerns about its future surrounding electronification and the Basel III’s capital rules.

“We can now see some light at the end of the tunnel and perhaps people are beginning to see that leverage ratio is not the be all and end all of the market and we now need to start realising the potential of the repo market going forward, said McGrory.

“It is clear that in the last two-three years we have seen a real change in the way repo practitioners operate and have had to gravitate their business, this has all been driven by leverage ratio,” said Eugene McGrory, head of European Repo at BNP Paribas.

The discussions take place following a turbulent and well publicised period for the repo market including a report by the IMCA in November last year suggesting that the repo market was struggling and may not survive for much longer.

Mentioned within this report particularly was the issue of leverage ratio and the panel were quick to point out the impact that this has had on the repo market. The report also noted that the European repo market has seen little technological advancement.

“The smart thing to do, if we can make it happen, is to extend the balance sheet that is dedicated to repo by saving the balance sheet on the deposit side. The transfer of this towards repo has only upside for banks and for customers,” said Andreas Biewald, MD of the treasury department at Commerzbank.

“The repo market is niche and in spite of many obstacles such as regulatory impact as well as issues from a liquidity point of view it can grow.”

This followed earlier comments at the conference where panellists described the repo market in the mid-90s as being like the ‘Wild West’ due to a lack of formal regulation.

“In late 1990s there was an effort to overturn what we saw in the mid 90s which was a little bit like the Wild West where there was only an element of self-regulation which seems very strange considering the environment we operate in now,” said panellist James Tomkinson.

Introduction of LCH Repoclear in 1999 was believed to have improved the state of the market and regulation of electronic trading which was considered to be opaque.

The panel went on to discuss the wider changes in practices that the repo market has seen since particularly the cost of brokers’ fees.

“At the time of the 1990s we didn’t have electronic trading, transparency was a word we didn’t know in this market and we were paying astronomical fees to brokers, said panellist Michele Bertini.

Fees paid to brokers from certain investment banks at that time were reportedly up “up to €20 million”.

“We were arbitrating all markets and working with no rules and regulatory constraints at the time which in hindsight seems very strange,” added Bertini.