Europe’s Repo Market Expands as Banks Repay ECB Loans, ICMA Says

The borrowing and lending of European bonds in the repurchase, or repo, market expanded this year, even as U.S. trading contracted, the International Capital Market Association said.

The value of European repo contracts outstanding as of June 12 was about 6.08 trillion euros ($8.12 trillion), up 8.6 percent from December, the ICMA said in an e-mailed report today. The increase came as banks sought alternative funding after repaying extraordinary loans granted by the European Central Bank under its Longer-Term Refinancing Operations in December 2011 and February 2012, and as higher money-market rates lured lenders away from the ECB deposit facility, it said.

“This recovery in the European repo market is in marked contrast to the contraction in the U.S. repo market,” the Zurich-based ICMA said in a statement. “The LTRO repayments have contributed to tighter market conditions and a steepening money-market yield curve.”

The U.S. repurchase market shrunk to $4.6 trillion daily outstanding in July, down 35 percent from a peak of $7.02 trillion in the first quarter of 2008, based on Federal Reserve data compiled from its 21 primary dealers. In a repo, or repurchase agreement, securities are exchanged for cash, with the debt held as collateral for the loan.

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