Finadium: European Repo Conditions and Market Structure in 2023

Liquidity and market conditions, the role of buy-side clearing and the dynamics of post-trade processing are three leading themes driving European repo markets today. This report provides market participant commentary and our own analysis to assist both private sector and government actors in forming a holistic view of market thinking and developing the means of forecasting what the next 12-18 months might look like.

European repo markets sit at the intersection of multiple geographies and competing trends related to stability and volatility. These are caused by central bank interventions, divided regulatory jurisdictions and the needs of market participants. At the same time, daily trading functions are going through major evolutions in post-trade and market infrastructure. Any one of these factors is enough to shake up a market. Taken together, they are changing the European repo space.

A key question in European repo is what happens when the European Central Bank (ECB) is repaid all of its targeted longer-term refinancing operations (TLTRO) money and engages in Quantitative Tightening with more emphasis. Will this result in more volatility that can only be solved by central bank re-intervention, or will market participants adjust to find a balance between the needs of dealers, cash managers and leveraged investors? This friction can also mean opportunity for European capital markets.

In some ways, questions of liquidity and scarcity in European repo seem like central banks working to solve central bank problems. Central banks have overengineered their programs, say some repo market participants, and now need to reverse engineer to get themselves out of the way. Similarly, market participants are negative about the idea of a European equivalent of the US Reverse Repo Facility or Standing Repo Facility. Better to encourage central banks to exit the markets in an orderly way and let the private sector take over from there.

Looking to the rest of 2023, awareness of buy-side clearing should increase with rate volatility. Regulatory concerns about liquidity management may also play a role, especially as aftershocks of the Silicon Valley Bank and Credit Suisse collapses hit in Europe and regulators ask domestic insurance companies about their Asset/Liability Management practices. While understanding the economic benefits and signing on legally and operationally may take some time, European models of sponsoring and client repo clearing have gained market and regulatory attention.

While there may be more actors in Europe than in other jurisdictions, with over 30 CSDs for example, the challenges of automation are no greater than anywhere else. Vendors, custodians, CSDs and triparty agents (sometimes the same institution) can work together and show flexibility around their proprietary solutions to achieve client end goals. The one looming area of concern is T+1 settlement. With the US and Canada heading in that direction in May 2024, Europe may not have the luxury of being too far behind. This will impose another major development effort on the repo post-trade space, coming so soon after CSDR. But the more automation, centralization of data and cross-collateral product integration, the easier a new transition may become.

The mix of dealers, cash investors, collateral providers, market infrastructure, vendors and related collateral trading desks contributes to a dynamic and changing European repo marketplace, and the needs of these groups may converge or diverge, as we heard between February and March 2023 at the Deutsche Börse GFF Summit in Luxembourg, the Finadium Rates & Repo Europe conference in London, and 25 additional conversations we had with market participants in preparation for this report. If central banks are successful in diminishing their role in private European repo markets, then the behavior of market constituents will again take center stage.

This report should be read by any market participant with an interest in European repo or fixed income.

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