European Repo Market Stagnates as Regulation Crimps Trading

  • Market rules hampering growth in repos, ICMA's De Vidts says
  • Total market size has dropped about 20% from June 2010 peak

Europe’s market for borrowing and lending securities, including government bonds, barely grew in the 18 months through June 10 with the total value of outstanding repurchase contracts at 5.6 trillion euros ($6.3 trillion), according to the International Capital Market Association. 

Trading in repos -- repurchase agreements where bonds are used as collateral for short-term loans -- acts as the essential plumbing for the wider fixed-income market as it allows traders, particularly those with market-making responsibilities, to obtain securities they need and to finance those they own. The market expanded 2 percent from 5.5 trillion euros in December 2014, the ICMA said. That was about the same as in December 2013, the smallest size since June 2009. 

The decline of the repo market in recent years has come amid an increase in regulation targeted at shrinking balance sheets at major banks. Borrowing of government debt has been most impacted as Basel III regulations on leverage ratios makes it less profitable to hold sovereign securities considering the relatively low returns and large trade sizes.

“The stability of the headline figure over the last few surveys does not tell the full story,” said Godfried De Vidts, chairman of the ICMA’s European Repo Council. “The repo market in Europe is not growing in line with underlying conditions.”

Increased bond issuance, excess liquidity from central-bank monetary policy operations and increasing demand for collateral driven by regulation means you would have expected more growth, he said. Instead, regulation is beginning “to bite,” De Vidts said.

Market Peak

The total market peaked at 7 trillion euros in June 2010. This year, the share of government bonds within the pool of European Union-originated collateral reported in the survey declined to 77 percent, from 81.5 percent in December.

“What’s interesting is less traded volumes in spite of theoretically growing demand for collateral from banks and central counterparties,” or CCPs, said Subhrajit Banerjee, a fixed-income strategist at HSBC Holdings Plc in London. “It shows how regulations have been detrimental for the market.” 

Growth in the repo market will “remain sideways, broadly,” Banerjee said. “High-rated collateral volumes may shrink. The European Central Bank’s quantitative-easing program and CCPs will be taking away a big share of high-rated collateral.”

Quantitative Easing

The ECB is buying about 60 billion euros of public debt each month, with the largest component comprised of German securities, which also are highly coveted as collateral, due to their AAA rating.

ICMA surveyed 65 offices of 61 financial groups for the total value of outstanding repos and reverse repos on June 10. This was two fewer respondents than the December 2014 survey. Using a constant sample of banks to eliminate the effect of changes in the survey sample, it is estimated that the market grew over the previous six months by 4.6 percent but shrank 3.7 percent year-on-year, ICMA said.

The survey doesn’t measure repo transactions with central banks as part of official monetary policy operations.

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