A snapshot survey by the European Repo Council (ERC) and International Capital Market Association (ICMA) shows that the European repo market has expanded since the end of 2013, indicating a “gradual trend back to normality as banks reduce their reliance on central bank liquidity”.
The survey asked financial institutions in Europe for the value of their repo contracts that were still outstanding at the close of business on June 11, 2014. The ERC received replies from 65 offices of 61 financial groups, mainly banks based in the EU, showing that the total value measured €5.78 trillion, compared with the €5.5 trillion in December 2013, though this was a bit of a drop year over year from the €6.07 trillion measured in June 2013.
The survey does not, however, measure the value of repos transacted with central banks as part of official monetary policy operations. Survey participants also vary a bit, as the last survey had two more participants, so the ERC also reports that with a constant sample of banks across survey, it is estimated that the market grew by 3.3% between December 2013 and June 2014, but it shrank year-over-year by 4.6%, due to the contraction in activity in December 2013.
The survey report was written by Richard Comotto, senior visiting fellow at the ICMA Centre at the University of Reading, where he is responsible for the FX and money markets module of the Centre's post-graduate finance program. In the report, Comotto writes that the growth in repo activity “would seem to confirm that the sharp decline in December was a seasonal aberration and that the market has resumed the steady revival seen since 2012 on the back of improving confidence in the recovery of eurozone.”
The share of tri-party repo in the survey broke the 10% mark to reach 10.2%, up from 9.9% in December. However, the outstanding value of tri-party repo reported directly by Europe’s major tri-party agents, thus representing the broader market, fell 1.5% to €1.32 trillion from the record €1.34 trillion reached in December 2013.
The sample of institutions in the survey were net borrowers from the tri-party market segment, funding 15.3% of their repo and accounting for 5.5% of their reverse repo.
In addition, the share of directly-reported tri-party repo accounted for by general collateral (GC) financing, mainly Eurex Repo’s Euro GC Pooling facility, went up from 14.3% to 16.8%.
For all repo reported in the survey, the share of voice brokers declined from 15.1% in December to 14% in June, while the share of electronic repo trading through Europe’s primary automatic repo trading systems (ATS)— BrokerTec, Eurex Repo and MTS—bounced back from 31.7% to 32.8% during this time. The outstanding value of all electronic trading grew by 7.8% to a new record high of €1.14 trillion. Direct trading by telephone and electronic messaging remained stable at 53.2%.
As for the terms of the transactions, the share of short-dated repos of one month or less to maturity increased to 60.3% from 57.7%, which Comotto says can be “attributed to a decision by investors that, with the euro yield curve so flat, the additional return for lending for longer terms is not worth the extra risk.”
The next survey is scheduled to take place at close of business on December 10, 2014.