The European Repo and Collateral Council (ERCC) of the International Capital Market Association (ICMA) has released the results of its 39th semi-annual survey of the European repo market revealing the total value of repo contracts outstanding on the books was €7,885 billion, compared with the record €,8,310 billion in December 2019.
This is a rise in the headline number of 1.6 percent year-on-year (YoY) but a fall of 5.1 percent since December. Adjusting for the change in the number of institutions in the survey, growth rates were minus 1 percent and minus 4.5 percent, respectively.
ICMA explains: “Most of the reduction in the size of the survey was at larger banks but the pattern of changes was very mixed across the survey sample”.
The latest survey saw a return of 61 financial institutions in Europe who responded providing the value and breakdown of their repo contracts that were still outstanding at close-of-business on 10 June meaning it was the first to take place after the market turbulence in February and March triggered by the COVID-19 pandemic.
ICMA observed that markets stabilised in April following the fiscal response by governments and emergency liquidity support from central banks.
However, the new survey shows clear traces of the impact of central bank asset purchases and other demand for high-quality assets during the crisis.
“The repo market plays a key role in collateral transformation from one type of security to another,” ICMA states. “During the market turbulence, despite regulatory constraints, the repo market also provided a resilient source of funding and safe-haven for investors.”
Banks further reported that, in light of the heightened volatility, it was more a case of risk-weighted assets limits becoming the binding constraint on business, rather than the leverage ratio, particularly for one-directional business flows such as net borrowers of cash, ICMA says.
Repo under SFTR
Since reporting under the Securities Financing Transactions Regulation (SFTR) began on 13 July, ICMA has aggregated and published the data from the trade repositories on its website. By October, this aggregated figure had reached €13 trillion.
While the SFTR data covers the whole EU market, ICMA says its data covers a significant part of the European market and gives a great deal more detail on market structure.
The latest SFTR data available before publication of the association’s survey report shows that the average daily turnover of all new SFTs was around 303,000 transactions with a total transaction value of €3,861 billion per day.
Much as expected, repo is larger in value than securities and commodities lending and borrowing (96.4 percent compared to 3.5 percent), but the number of loans is smaller (36.8 compared to 63 percent).
However, ICMA explains the difference between the two markets has been exaggerated by a flaw in the reporting rules that require loans of multiple securities to be broken up into reports of loans of individual securities.
Average daily turnover in new repos, both repurchase transactions and buy/sell-backs, was greater than 111,100 transactions with a total cash value of some €3.7 trillion per day. The outstanding value of all repos on 23 October was €13 trillion compared with the latest ICMA survey total of €7.885 trillion.
Central clearing counterparty (CCP) volumes are also higher in the SFTR results than in the ICMA survey, with 42.5 percent of outstanding repo cleared compared to 27.2 percent in the latest survey. The difference may reflect reporting by CCPs under SFTR but not in the ICMA survey.
Gareth Allen, chair of ICMA’s ERCC, says: “The ERCC Repo Survey has been the main window onto the European repo market for 20 years, providing a comprehensive overview of market trends, structure, and dynamics.
“In the wake of SFTR it is great to see that the headline numbers from the ERCC Survey align. The relatively limited public data coming from SFTR also highlights the importance of the ERCC Survey and suggests that it will remain a key market resource for many years to come.”
The next survey is scheduled to take place at close-of-business on 9 December. This will be the last survey before the end of the Brexit transition period.
