European Repo Conditions and Market Structure in 2023

Finadium
May 2023

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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.

This report evaluates three principal topics in European repo markets today: liquidity and market conditions, the role of buy-side clearing, and the dynamics of post-trade processing. A combination of market participant commentary and our own analysis will 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.

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 is a friction that can also mean opportunity for European capital markets.

Inputs for this report have been drawn from two large recent conferences and conversations with over 25 market participants in Q1 2023. This report should be read by any market participant with an interest in European repo or fixed income.

Table of Contents

• Executive Summary
• The Dominance of Central Bank Interventions
  • – A German Example
  • – Methodology
• Liquidity and Scarcity
• The Dynamics of Buy-side Clearing
  • – The Cost of Margin
• Post-Trade Opportunities and Collateral Optimization
• A Complex Market Dynamic
• About Finadium LLC