The European Repo and Collateral Council (ERCC) of the International Capital Market Association (ICMA) has released the results of its 39th semi-annual survey of the European repo market. The survey, which calculated the amount of repo business outstanding on 10 June 2020, from the returns of 61 financial institutions sets the baseline figure for European market size at €7.885 billion down from the record high of €8.31 billion in the December 2019 survey.
The latest survey took place after the market turbulence triggered by the COVID-19 pandemic, in February and March (for a detailed assessment see ‘The European repo market and the COVID-19 crisis April 2020’) which stabilized in April following the fiscal response by governments and emergency liquidity support from central banks. However, the June survey shows clear traces of the impact of central bank asset purchases and other demand for high quality assets during the crisis. The repo market plays a key role in collateral transformation from one type of security to another. During the market turbulence, despite regulatory constraints, the repo market also provided a resilient source of funding and safe-haven for investors.
Increased asset purchases by the ECB and enhanced financing under TLTRO III facility contributed to a reduced use of a number of EU government securities as collateral, which was reflected in the fact that UK government securities, which have been subject to relatively less purchases by the Bank of England, now provide the largest pool of collateral in the European repo market.
While the survey showed continued contraction of the share of automatic electronic trading, data reported directly to the ICMA by the trading platforms showed 30% growth, suggesting that there has been strong growth in electronic repo between firms not in the ICMA survey, which probably means smaller banks, who are either new or previously light users of electronic trading. There is anecdotal evidence to support the suggestion that automation was accelerated by the hectic trading which was triggered by the Covid crisis. This is also evident in the strong growth in automated trading (using requests for quotes), which is reported in the survey as direct trading.
Compulsory reporting under the EU Securities Financing Transaction Regulation (SFTR), began on 13 July for virtually all entities established or located in the EU of all securities financing transactions (SFTs), including repos. ICMA aggregates and publishes the data from the trade repositories on its website. By October, this aggregated figure had reached €13 trillion. While the SFTR data covers the whole EU market, the ICMA data covers a significant part of the European market and gives a great deal more detail on market structure. The advent of SFTR reporting may also have contributed to increased use of electronic trading platforms, which provide a convenient way of digitizing transaction details for processing into reports.
Gareth Allen, chair of ICMA’s ERCC said: “The ERCC Repo Survey has been the main window onto the European repo market for twenty years, providing a comprehensive overview of market trends, structure, and dynamics. In the wake of SFTR it is great to see that the headline numbers from the ERCC Survey align. The relatively limited public data coming from SFTR also highlights the importance of the ERCC Survey and suggests that it will remain a key market resource for many years to come.”