Centrally cleared repo transactions saw market share double last year, while non-OTC clearing shrank, but the figures may not represent wider trends in the market.
The figure from the European Securities and Markets Authority’s (ESMA) latest report titled Trends, Risks and Vulnerabilities, which focused on European markets, reveals significant change in central clearing ahead of regulatory changes. It also highlights improving conditions in European markets.
The share of transactions cleared by European central counterparties (CCPs) doubled to 30% in 2012 compared with 2013.
However, the rise in market share may be largely due to falling non-OTC activity.
“We’ve looked closely at the figures and it seems that absolute value of repo transactions has actually remained stable, they’re making up a bigger slice of a smaller pie,” said Laura Craft, director of equities and fixed income at post-trade services provider Traiana.
However, Craft said repo market activity is on the increase, but is not reflected in ESMA’s figures as much of this is not being centrally cleared.
“Anecdotal evidence suggests that more participants are looking to clear their repo trades bilaterally,” she added.
Repo activity also showed signs of normalizing, with reduced spreads between repo and unsecured rates and increased rate convergence.
While repos have seen a huge jump in cleared volumes, non-OTC derivatives, which form the largest chunk of cleared volumes, have continued to decline from approximately 80% of European cleared volume in 2007 to just 60% at the end of 2012.
Non-OTC derivatives also saw their average size stabilise at around €45 million in 2012 after falling significantly during the financial crisis. Though the market has improved, average size of transactions is still approximately 75% of the level it was pre-crisis.
Collateral availability has also improved, with the supply of high-quality collateral growing by a huge €709 billion in 2012. ESMA expects this growth to continue, albeit at a slower rate, with around €350 billion of additional high-quality collateral supply in 2013.
Liquidity in European blue chips has remained high, with the median bid-ask spread remaining below its five-year average at around four basis points.
ESMA’s research found a small rise in big-ask spreads between Q1 2013 and Q2 2012 but said this was largely due to illiquid market conditions as the holiday season approached and current spreads remain well below the all-time high of 30 basis points seen in December 2008 during the financial crisis.
However, ESMA’s research reveals a split across countries, with many national indices seeing increased liquidity while a few countries saw falling liquidity due to “low turnover and investors’ reduced willingness to trade”. While the report does not mention the specific countries, research from other sources such as TABB Group suggests that Italy and France in particularly have seen a rapid loss in liquidity due to the introduction of national financial transaction taxes.
Market turnover also improved with a significant rebound from the sharp falls seen in late 2012. Monthly European turnover in June 2013 hit €855 billion, a 30% increase from December 2012 and is approaching its five-year average of €960bn.
Dark pools saw an even more substantial improvement, with turnover climbing 70% over the same period to €16bn. Activity in dark pools has been steadily increasing in recent years as it recovers from the financial crisis, increasing from 0.8% of total volume in 2010 to 1.8% of total volume today. ESMA’s figures also do not take into account broker crossing networks, so actual dark volumes are likely to be significantly larger.
While liquidity in equities has remained stable, market volatility has been growing, with expected volatility of 19.9% in Q2 2013, up from 18.4% in the previous quarter. ESMA noted that volatility began to increase rapidly from June, when markets first began to react to the possibility of the US Federal Reserve tapering its quantitative easing program.
Despite the increase, volatility remains below its five-year average and ESMA regards current volatility as moderate compared with recent years.