The European repo market fell 8.2% over the last six months, from €6,079 billion in June 2013 to €5,499.3 billion in December, according to a survey by the European Repo Council.
The ERC’s latest survey, conducted on Dec. 11 2013, asked a sample of financial institutions in Europe for the value of their repo contracts that were still outstanding at close of business on Dec. 11, 2013. Replies to the council’s 26th semi-annual repo survey were received from 68 offices of 64 financial groups, mainly banks. Returns were also made directly by the principal automatic repo trading systems (ATS) and tri-party repo agents in Europe, and by the London-based Wholesale Market Brokers’ Association.
The €5,499.3 billion recorded on the books of those institutions at that date is the lowest result for over four years. It is much higher than the crisis trough of €4,633 billion in December 2008 but much lower than the pre-crisis peak of €6,775 billion in June 2007.
The author of the survey, Richard Comotto of the International Capital Markets Association (ICMA) Centre, University of Reading, indicated that several factors may have been at work: “The contraction of the market would seem to be the result of the usual shrinkage of repo books at year-end plus the impact of the liquidity offered by the ECB in December in order to relieve any seasonal funding shortages. It may also have been driven by the anticipation of future regulatory constraints on short-term wholesale funding.”
Despite the provision of lending in euro by the ECB over the year-end, the share of the euro recovered further from its recent low of 57.0% in June 2012, to reach 66.3%,. This usually reduces the need to borrow euro in the market. The fact that the euro did not retreat this time may reflect the strength of the underlying trend back to market funding in the Eurozone, says the survey. On the other hand, the share of euro in the tri-party and voice-brokered segments of the market did fall back, it adds.
As in the past, the survey notes ECB lending was reflected in a drop in the share of domestic business, as well as a reduction in the share of the electronic market. With a fixed-rate full allotment facility from the ECB, Eurozone banks had less need of market funding. “To this extent, the ECB’s facility slowed the return to the market seen in the previous survey, albeit temporarily,” says the survey. “However, the continued recovery in market confidence seems to have sustained the share of directly-negotiated repos. And the trend back towards market funding was still visible and not just for core eurozone banks. Thus, there was a large increase in the share of Italian collateral.”
A “conundrum” in the latest survey results was the increase in anonymous (ie CCP-cleared) electronic trading. Anecdotal evidence suggested that banks were taking advantage of increased market confidence to shift out of CCP-cleared trading and take advantage of the lower haircuts in the uncleared market. “It is possible that a new question in the survey asking banks to break out GC financing business may have produced a one-off adjustment to the total for anonymous electronic trading (which includes GC financing) that obscured the underlying trend,” says the survey. “It is also possible that reports of a net migration out of CCP-cleared business have been exaggerated. While Spanish banks appear to have reduced their use of the domestic CCP, this business is not electronically originated. And some Italian banks appear to have been forced into the CCP-cleared market by counterparty credit concerns arising from political instability in Italy.”
The reduced need for market funding would normally have been expected to hit the share of tri-party repo, as this is a pure cash-driven product. However, the share of tri-party repo actually increased, if only modestly. And there was a dramatic expansion of the tri-party market outside the survey, which would seem to confirm anecdotal evidence of new entrants arriving into that market.
Speaking at the Clearstream Global Securities Financing forum today, Comotto alluded to the potential impact of non-government bonds on the tri-party repo market: “When we hit the crisis there was the immediate jump in government securities but then that falls back – there is a hording of core euro government bonds and the sovereign debt crisis and people fighting shy of those bonds.
“The thing to notice we are still at levels of 80 -81 %, which is still largely all about government bonds and this is a problem for tri-party repo providers in Europe. If you’re in the U.S. most government bonds are cleared through tri-party and therefore you’ve got a slightly bigger cake to fight for. If you are in Europe then traditionally tri-party is being used mainly for non-government securities so you’re really fighting for a slice of a smaller cake – there are inherent limits.
“The usage of government bonds in tri-party has jumped- before the crisis you were talking about average levels of about 20, 22, 23 % for government bonds and post crisis we’re talking about levels of 45-55%. At the moment the relative focus on non-government securities means that tri-party is down and around 10% of the European market.”
European Repo Market Declines 8.2% in Six Months, Survey Finds
ICMA says the contraction of the market may have been driven by the usual shrinkage of repo books at year-end, the impact of the liquidity offered by the ECB in December in order to relieve any seasonal funding shortages and the anticipation of future regulatory constraints on short-term wholesale funding.
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