The total value outstanding of repos and reverse repos on the books of the 61 institutions that took part in the recent European Repo and Collateral Council (ERCC) survey has grown to a record high of €10,374.2 billion, a 12.8 per cent rise year-on-year and 7.2 per cent rise from the June 2022 survey.
Some of this increase in value outstanding reported in the latest European Repo Market survey, which measured the amount of repo business outstanding on 8 December 2022, reflects the addition of new participants to the survey — up from 56 participants who contributed data to the 8 June 2022 ERCC survey.
The latest survey reported a sharp drop in the share of triparty repo from 9.0 per cent in June 2022 to 6.5 per cent, which occurred despite an increase in the number of participants reporting triparty business and the revival of general collateral (GC) repo.
Data provided by automatic trading systems (ATS) in Europe highlighted a further acceleration in the growth of repo trading value. The outstanding value of repos executed on these platforms increased 15.7 per cent to €1,651.4 billion on 8 December 2022, compared with the previous survey in June 2022.
However, growth in the outstanding value of ATS trading was boosted by the addition of SIX SIS to the set of ATS providing separate returns to the survey, meaning there was a significant deceleration in the growth of ATS balances, the survey reports.
The European Repo Market survey conducted by the International Capital Market Association (ICMA) reveals that the key developments impacting the survey were the market turmoil in September and dealer preparations for the year-end, resulting in the temporary winding-down of their balance sheets.
The market turmoil, arising from uncertainty over the pace and size of central bank interest rate increases and the shock of the UK mini-budget, occurred against the background of rising activity in the repo market, in addition to increased cash-driven trading and growing securities-driven trading, reports ICMA ERCC.
These events helped to boost demand for German and, to a lesser extent, other core eurozone government securities. However, the sell-off of UK gilts by Liability Driven Investment (LDI) pension funds “may have sapped subsequent activity in the gilt repo”.
ICMA notes that as the year-end approaches, dealers typically “window dress” their balance sheets by shrinking them to minimise costs and consequences linked to end-year balance sheet size. In 2022, these concerns manifested themselves as early as summer. Forward prices implied severe market tightness by the year-end, the survey reports.
Notwithstanding, the report indicates that the 2022 year-end passed smoothly. This was largely the result of early preparations by dealers and their customers and supportive action by the market authorities — for example, the issuance of additional German government securities and the loan of these securities to ease collateral shortages.
