The European repo market had transactions worth Euros 5,319 trillion outstanding at the beginning of the second week in June this year. Or so reports the European Repo Council (ERC) and the International Capital Market Association (ICMA) – the new entity that combines the International Securities Market Association (ISMA) and the International Primary Market Association (IPMA) – in their ninth semi-annual survey of the repo market in Europe.
The survey, conducted on 8 June 2005, put the size of the European repo market up considerably on December 2004, when its size was last measured. Growth for a constant sample of banks was 19% year-on-year, almost identical to the growth rate in the previous year (June 2003 to June 2004). The market has exhibited consistent year-on-year growth of between 16% and 19% in the last two years, despite weak conditions in the European fixed income markets. In absolute terms, volumes traded grew by 14% over the six months to June 2005.
“Despite a perceived slowdown in wholesale banking activities, the repo market has proved to be integral to core financing and has firmly stated its importance with yet another increase in outstanding volumes,” says Godfried De Vidts, Chairman of ICMA’s European Repo Council. “As Basel II approaches, with its capital requirements affecting all banks in Europe, this trend to increased use of repo is set to continue.”
This latest survey also shows that the astonishing growth in the market share taken by electronic trading has stabilised. It was virtually unchanged at 21.2%, compared to 21.3% in December 2004. That said, anonymous electronic trading has contracted in relative terms to 10.4% of the market – a shrinkage attributed by most observers to the delays experienced by LCH.Clearnet in introducing new CCP services.
The main tri-party providers – Bank of New York, Clearstream, Euroclear and JP Morgan – will be disappointed that tri-party repo is still failing to increase its share of a growing market. Its share of 10.4% was up on December last year, but still below its peak of 11.2% in December 2003.
The structure of the repo market as indicated by the relative shares of different segments – currency, collateral and maturity distributions – remained similar to previous surveys, with one exception. The share of government bonds in collateral issued in the European Union fell to a record low of 85.7%. Survey author Richard Comotto says this almost certainly reflects the growing role of credit repo – that is to say, corporate bonds used as collateral – in Europe.
ERC chairman Godfried de Vidts reckons the European repo market would grow even faster if the Continent had a “uniform market infrastructure” of the kind outlined by both Giovannini reports and by the European Commission through the CESAME working group. “The market and the European Repo Council have for years emphasised the gaps in repo delivery and settlement systems,” he says. “These issues need to be resolved speedily with the co-operation of governments, central banks and EU institutions if the repo market is to contribute fully to the achievement of the goals laid out in the Lisbon agenda.”