The International Capital Market Association (ICMA) has released the results of its latest survey into the state of the European repo market. Over the years these surveys have mirrored the fluctuations in the repo markets and this 25th survey which represents statistics gathered in June 2013* is no exception.
Repo Market Overview
Highlighting an overall increase in repo trade of 8.6% over December 2012, the analysis behind the statics reveals some interesting variances. For example, whilst electronic repo trading at 33.1% of the total reached an all time high and directly negotiated repos (52.3% of total) also showed good recovery, voice negotiated repo trades were at an all time low, representing just 14.6% of the total volume.
Repo trading within the Eurozone also showed good signs of recovery but trade with countries outside the Eurozone remained weak, representing just 29.3% of the volume, a fall from the 31.6% seen in December 2012. Domestic repo business accounted for 30.7% of the total, intra-Eurozone trading took up 18.9% of the repo volume whilst anonymous trades accounted for the remaining 21.1%. The survey’s authors suggest that this change in volume mix may partly reflect “an incipient revival in the interbank money market” and partly a growing market confidence allied to the availability of repo rates in excess of the 0% available from the ECB. In addition many of the voice traders are based in London and it is suggested that these London-based agents may have broadened their spread thanks to the revival of interbank activity in the euro money market.
Repo Clearing and Settlement
When looking at the repo clearing and settlement analysis the share of tri-party repo appears unchanged at 9.6% whilst the volume reported by tri-party agents in Europe rose. The survey’s authors believe that the size of the tri-party repo segment is understated and intend to undertake further analysis in the December 2013 report to more fully identify the use of tri-party repo management services.
Repo Collateral Analysis
Perhaps one of the most interesting elements of the survey was the way in which the collateral analysis revealed no significant shifts in the relative percentages apportioned to each country. Although UK Government securities did fall by 1.9% to 10.5%, this was easily explained by May’s market sell-off. Otherwise the changes were relatively minor with adjustments seen mainly being due to concerns over credit risk or general market adjustments.
Looking at tri-party collateral, with the exception of covered bonds and ABS, a modest narrowing of haircuts is seen as a response to reduced risk-aversion. However where the specific issues offered as collateral have changed, some evidence of increased haircuts is evident.
Three main themes
Summing up the evidence gathered within this survey the authors consider that three main themes emerge from the data. These are a start to the normalisation of the market, greater market confidence and greater opportunities to take interest rate risk in the light of increased demand.
If you want to read more and download the report go to: icmagroup.org
*65 institutions responded to the latest survey of which 57 participated in the last 3 surveys. Comparative period statistics are drawn from these 57 entities with figures representing the value of outstanding settlements on a fixed date. Repo trading with central banks as part of monetary control is excluded from these figures.
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