An article in Bloomberg on September 17, 2012 by Rebecca Christie and Jim Brunsden entitled “ECB to Set Up Repo Database as EU Moves to Rein in Shadow Banks “ is worth a quick read. We have some thoughts on the matter too.
Despite the title, there really wasn’t much about repo in the article other than the EU Finance Ministers had proposed a plan to create a repo database. It seems what really irks regulators about repo is that no one really knows how big the markets are. Estimates are based on a triangulation here, an official statistic there, and some educated guesses. It is one reason (although by no means not the only one) that repo finds itself bundled under the shadow banking banner.
By its nature, repo has two principals so double counting is rife. Participants can opt to book trades in one jurisdiction — then swing the trade to another – further confusing an accurate count. A repo trade repository is a really good idea, although it will need to be contingent on a couple things being done beforehand:
- Legal Entity Identifiers (LEI) must be in place so we know who is being counted.
- The database must be global. Unless the administrators only include trades between two European entities (and how they figure that out without accurate LEIs is anyone’s guess), then the leakage could be substantial.
- Securities lending should also be included. This will mean the ability to identify agents as well as underlying lenders.
- Databases ought to include identifiers that indicate the type of collateral being dealt and what haircuts are used. Ideally exposure numbers should be included too although the IT trail that leaves makes our head spin.
As long as the market is OTC and trading terms anything but homogeneous, gathering meaningful data will be a challenge. Market participants might see this as the first step toward centralized & transparent exchanges. Exchanges will never be a welcome development in the clubby and opaque securities finance world. If the regulators want the data to be able to monitor the market and, more importantly when there is market stress be able to quickly identify who is at risk, then they will quickly find out that “the devil is in the details”. A high level database might make regulators sleep better at night, but its value will ultimately be limited.
A link to the article is here.