European Repo Market
The European repo market is now worth well in excess of EUR 6.77 trillion in terms of deals outstanding Repo is already one of the fastest growing sectors of the international capital market with further spectacular growth expected.
The larger part of this growth was registered during the second half of 2006, with growth flattening in the first half of 2007 probably reflecting market expectations of rising official interest rates.
Driven by the tightening of regulatory capital requirements and the pressure on banks to contain credit risk and improve their economic capital effi ciency in a more competitive global market the European repo market has grown rapidly since the mid 1990s.
The International Capital Market Association’s semi-annual survey of the repo market in Europe shows an increase in market size of of 15% over 2006, compared with an increase of 18% in 2005.
Repo is the essential financing tool which effectively underpins capital market operations by funding bond positions in the wholesale capital markets, which in turn are used for hedging and arbitrage strategies against derivatives.
TRAX now offers both the buy and sell side access to full repo matching capabilities with the introduction of our new Fund ID database. To read more about this exciting development please see:
Recent market developments
In this high growth, fast paced market Repo is still traded in large volumes over the counter (OTC) which can lead to increased levels of operational risk through human error, delayed settlement and verifiication. The necessity for an integrated and streamlined electronic matching system can not be over stated.
This latest survey also shows that the share of trading in the repo market through electronic trading system returned to 21.9%, close to the level reported for June 2006. This is interpreted as the expected rebalancing of the spike in market share for this sector reported in December 2006. However, the share of the electronic repo market settled through a central clearing counterparty (and traded anonymously) also fell back sharply to 10.3% in the June survey; this probably reflects differences between the distribution of electronic trading in the survey sample compared to the market at large.
The market share of triparty repo, where the collateral is held by a third party agent, reducing the administrative burden and also the counterparty risk of the transaction, reached a record high of 11.8%.
Commenting on the survey results, Godfried De Vidts, Chairman of ICMA’s European Repo Council said: “Growth in the repo market continues and although the sample of banks covered by this survey has gone down it is clear that there is a strong upward trend in outstanding volume. Repo is becoming a commoditised business hence the growth of electronic trading and in particular growth in anonymous trading volumes through a central counterparty.
The continuous drive by the EU Commission through various initiatives to make clearing and settlement more efficient and ongoing ECB discussions regarding Target 2 Securities should mean that clearing and settlement of this high volume business will become cheaper. As chairman of the European Repo Council I appeal to all banks active in this market to participate in the survey as it is an essential tool for development in this market”. The results of the repo survey were presented today at the General Meeting of the European Repo Council, a forum affiliated to ICMA, where the repo dealer community meets to discuss the practical challenges of this rapidly evolving marketplace.
Repo Matching Solution:
In this high growth, fast paced market Repo is still traded in large volumes over the counter (OTC) which can lead to increased levels of operational risk through human error, delayed settlement and verification.The necessity for an integrated and streamlined electronic matching system can not be over stated.
Godfried De Vidts, Director of European affairs at ICAP and Chairman of ICMA’s European Repo Council (ERC) commented: "Any time an instruction fails in the chain of events it requires somebody to intervene manually. Matching repo trades through TRAX2 will decrease costs, especially in the back office”.
The International Capital Market Association, working closely with the operations committee of the Association of Foreign Banks (AFB), the European Repo Council (ERC) and ICMA members, has built TRAX2 to meet the needs of the repo market by including full repo trade matching capabilities amongst other new functionality for the European Repo Market.