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European repo market side-lined by ECB LTROs

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The European Repo Council of the International Capital Market Association (ICMA) has released the results of its 23rd semi-annual survey of the European repo market.

The survey, which measures the amount of repo business outstanding on 13 June, sets the baseline figure for market size at EUR 5,647 billion compared to the total figure of EUR 6,204 billion reported in December 2011.

Based on a constant sample of banks, the market contracted over the last 6 months by 9.9%. This decline was in large part due to the effect of the ECB’s 3-year Long Term Refinancing Operations (LTRO), both of which took place after the December 2011 survey. Banks have reduced their reliance on funding from the repo market as a result of their access to generous LTRO financing. The size of the market remains well above the level recorded in the December 2008 survey (EUR 4,633 billion).

The share of the market traded electronically reached a high of 33.1% of the sample, with a corresponding decline in the share of voice-brokered repo business. Trading through an Automatic Trading System (ATS) is the easiest way to access Central Counterparty (CCP) clearing, which is attractive to banks seeking to reduce risk and anticipate regulatory pressure to clear transactions across CCP.
 
Risk aversion remains an important factor in the selection of collateral. However, this is no longer automatically reflected in increased use of government bonds. On the one hand, the share of German government bonds as collateral has dropped to 14.2% (from 15.4%) due to scarcity as a result of hoarding by investors seeking safe haven assets. On the other hand, credit concerns have driven a reduction in the use of Spanish government bonds as collateral. The search for safe havens may also be behind a continued increase in the use of UK collateral to 15%.
 
The share of tri-party repo in the survey fell to 10.9%, but data from the tri-party agents shows growth in this sector, supporting anecdotal evidence that this business is growing amongst non-bank financial institutions that are not part of the ERC survey.
 
The latest survey confirmed the trend to a significant lengthening of the maturity profile of European repo in anticipation of stricter regulatory liquidity requirements, with transactions with more than a year to maturity expanding to 13.3% of the survey.

Godfried De Vidts, Chairman of ICMA’s European Repo Council, says: “This latest repo survey gives a reliable picture of the current size and structure of the European repo market and clearly shows the impact of potential regulatory changes as anticipated by the market. The ERC’s commitment to compiling data on the European repo market through the survey has provided beneficial insights into this important funding product for over a decade.”

The ICMA ERC remains actively involved in consultations on regulatory initiatives which will impact the repo market. It has commissioned a number of academic studies which have contributed to the FSB’s fact finding exercise ahead of the publication of its recommendations on Securities Lending and Repo in September and is monitoring the call by the European Parliament and the European Central bank for a repo trade repository.

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