ICMA says repo growth stalled

If the data compiled by the European Repo Council of the International Capital Market Association (ICMA) are accurate, growth in Europe’s repo market has stalled and market outstandings are nearly 3 percent down on a year ago. ICMA’s 29th semi-annual survey of the market, which measures the amount of repo business outstanding on June 10 2015, sets the baseline figure for market size at EUR 5,612 billion. While this is up 2 percent from the headline figure of EUR 5,500 billion in December 2014, it is 2.9 percent down from the figure of EUR 5,782 billion recorded a year ago in the survey for June 2014.

The main trends identifed include the following:

A further increase in the share of directly-negotiated transactions, which have been increasing since 2012. This is presumed to reflect a regulatory-driven shift away from low-margin interbank and commoditised transactions, much of which are electronically traded, towards customer and customised business, most of which is directly negotiated.

Domestic repo continued its long-term decline, probably reflecting the restructuring of the European repo business in the face of regulatory and other challenges.

The share of tri-party repo fell back to 10.0 percent from 10.5 percent and the outstanding value of tri-party repo reported directly by the major tri-party agents in Europe also contracted. Together with the drop in the use of GC (general collateral) financing facilities, this may reflect a reduced need for funding against a backdrop of continued central bank assistance.

There was a drop in the share of all government bonds within the pool of EU-originated fixed-income collateral reported in the survey to 77.0 percent from 81.5 percent. This change was driven to some extent by an increase in non-government bond and equity collateral. It may reflect a focus (albeit temporary) on higher margin business and is likely to be related to the drop in the share of electronic trading. There was a sharp decline in Japanese collateral and increases in the shares of US and ‘other OECD’ collateral.

Godfried De Vidts, chairman of the council, said: “The stability of the headline figure over the last few surveys does not tell the full story. The repo market in Europe is not growing in line with underlying conditions. Increased bond issuance, extraordinary excess liquidity from LTROs and QE and increasing demand for collateral driven by regulation might reasonably have been expected to produce an increase in repo trading.

“The secured financing business is already facing significant pressure as the implementation of regulatory initiatives such as the leverage ratio, net stable funding ratio, central securities depositories regulation and bank recovery and resolution directive begin to bite. A further qualitative study on repo in Europe, to be released next month, will give us greater insight into the profound changes underlying these aggregated figures.”