The International Capital Market Association’s (ICMA’s) European Repo and Collateral Council (ERCC) released the results of its 46th semi-annual survey of the European repo market.
The total value, at close of business on December 13, 2023, of repos and reverse repos outstanding on the books of the 60 entities who participated in the latest survey reached €10,899.8 billion, a new all-time high. This means that the repo books of the survey sample grew by +1.0% since the last survey (from €10,794.4 billion) and +5.1% year-on-year (from €10,374.2 billion), continuing the uptrend that started in 2016 by the ECB’s Enhanced Asset Purchase Programme (EAPP) and the market’s assimilation of post-GFC Basel regulations on capital, leverage and liquidity.
These latest growth rates compare with +4.1% and +11.5%, respectively, in the June survey, suggesting that there was a further deceleration in the rate of growth of the survey sample in the second-half of 2023. Adjusting for changes in the composition of the survey sample, notably the withdrawal of Credit Suisse, reveals faster underlying growth of 3.1% in the second-half of 2023 and no deceleration in the growth of the survey sample since the first-half but confirms that there was a significant slowing-down in the rate of growth since 2022.
Summary of key findings:
- The long-term net reverse repo position (lending cash and borrowing securities) of the survey sample, which reflected the collateral scarcity created by central bank asset purchases had been dramatically reduced in June by the central bank pivot from QE to QT and increased government securities issuance. However, the net reverse repo position was largely restored in December as dealers transferred balance sheet capacity from Europe to the US and Asia and increased their borrowing of US Treasuries and JGBs in response to expectations of shifts in monetary policy.
- The transfer of balance sheet capacity from Europe to the US and Asia was also reflected in increased positions in the US dollar and Japanese yen, a decline in the share of European bonds (although gilt repo was sustained by the high yields on sterling assets) and a higher share for cross-border trading into and out of the eurozone.
- The shift in balance sheets also seems to have depressed trading in automatic repo trading systems (ATS) in Europe, as these platforms specialise in European government securities. ATS also may have lost volume because of the reduced need of dealers to rebalance collateral (a key function of these platforms) as a result of increased issuance of government securities. This had a knock-on effect on CCP-clearing, which is intimately linked to automatic trading. CCP-clearing may also have been affected by the benign market conditions at year-end.
- Tri-party repo continued to recover as central banks drained liquidity and reduced the return on official non-monetary deposits. The tri-party market also saw further inflows of covered bonds as the ECB’s TLTRO facility continued to be unwound.
The shares of floating-rate repos in the survey continued to grow as interest rate hikes continued over the summer. - Unusually for end-year, short dates increased. However, strong growth in positions between one and six months lengthened the overall weighted average term-to-maturity of repo books, reflecting collateral swaps, which are used to reduced balance sheet size at end-year.