European Repo Demonstrates Its Resilience

At a Glance

  • European repo activity in March averaged more than $284 billion per day
  • Buyers rebalanced their portfolios away from assets perceived to be riskier and towards short-term secured instruments.

The European repo market has held up well amid the initial volatility created by the economic slowdown caused by COVID-19, according to a new report issued by the International Capital Markets Association (ICMA).

Activity on European repo has increased in recent weeks, the ICMA notes.  CME Group’s BrokerTec platform, which handles the majority of European repo activity, experienced higher than normal transaction flows, with March volume averaging €284.7 billion per day and a new record of €319 billion set on March 11.  An ICMA survey of repo providers also reported that the biggest banks increased their activity, although some smaller banks reduced their exposure.

Some sellers turned to the repo market to generate cash that would allow them to cover fund outflows. At the same time, European buyers used the repo market to rebalance their portfolios away from assets perceived to be riskier and towards the relative safety of short-term secured instruments.

Minor Issues

The ICMA report does note a few issues with the European repo market’s ability to absorb the increased activity levels.

Some banks that facilitate repo transactions struggled to keep pace with customer demand, while there were reportedly occasional delays with processing and settlement, in part because institutions were experiencing their staff working from home for the first time.

Automated solutions, such as BrokerTec Quote, which reduce steps in traders’ workflow, are seeing greater appetite as a result of the complexities of homeworking, with customers looking in particular to speed up and simplify their negotiations and request for quote (RFQ) trading.

Concerns also emerged in the run up to the end of the first quarter that European banks would reduce their repo capacity, either to prioritize other areas or to reduce exposure over the quarter-end, but intervention by central banks eased the situation by freeing up the banks’ credit lines.

“In the exceptionally stressed conditions experienced in February and March this year the repo market continued to perform relatively well, while showing some signs of strain in the face of greatly increased client demand,” noted Gareth Allen, the chairman of the ICMA’s European Repo and Collateral Council.

Repo Growth Continues

Even before the increased activity levels generated by the impact of COVID-19, the European repo market was going through a growth phase.

An ICMA survey of outstanding commitments in the European repo market on December 11, 2019 revealed that the baseline figure for the size of the repo market had reached a record €8.3 trillion, around 7% higher than the total recorded in June 2019 and almost 6% higher year-on-year.

Source: ICMA survey

The ICMA reports some concerns that the continuing reduction in the share of German government securities, which now account for less collateral than Italian and UK government securities, may be a sign of increasing collateral scarcity.  This could be the result of renewed bond purchases by the European Central Bank (ECB), the report suggests.

But the European repo market’s recent growth and its resilience during a challenging period indicate a market in relatively good health.

The European repo market plays a key role in satisfying increased demand for high-quality liquid assets that enable firms to satisfy regulatory ratios and continues to adapt to the complex regulatory demands introduced in recent years, the ICMA notes.

is Global Head of Research at CME Group. He is based in London.

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