Our comments on the latest ICMA repo market survey (Finadium subscribers only)

The ICMA published their bi-annual repo market survey yesterday. This is typically a very good read and contains valuable data that we reference on a regular basis. This latest survey is no exception. Our comments on regulation, volumes and the LTRO are below.


The LTRO created strange and unintended consequences across financial markets in Europe, and the early repayment by some banks will likely give in uplift to the repo markets but not solve the problem entirely. The ICMA noted that easy financing at the European Central Bank through the LTRO has negatively affected repo and that a bank by bank comparison shows outstanding volumes down by 12%. We agree that the LTRO is at the heart of this decline.

The flip side of this deadline is the potential that as banks do repay their LTRO obligations, we will see repo market volumes will increase. The value of the repo market here is the cost of financing and the reputational implication of borrowing from the ECB versus interacting at market rates. Certainly, if the ECB is charging 1% (albeit for 3 years) and repo returns are under 20 basis points, then the repo market is the better deal for banks with strong credit and credit-worthy holdings. It also looks better for firms to be able to borrow in the markets then have to turn to the government for support.

The ICMA thinks that LTRO has also affected the tri-party repo business, with tri-party volumes dropping from EUR 1.109 trillion in June 2012 to EUR 1.003 trillion in December 2012. This is a significant drop given the increased use of tri-party in general as an operational outsourcing and risk management method. The share of tri-party repo also dropped slightly from 10.9% to 9.5% of total transactions. CCPs continue to gain traction however.

Separate from the report, the ICMA’s press release was extremely concerned about the possibility that Europe’s proposed FTT would tax repo. The European Repo Council’s Godfried De Vidts said “The FTT proposals to tax repo transactions put the economic viability of repo, including triparty, transactions at significant risk, which will lead to less liquidity provision to the real economy.” We heard a smart commentators say recently that it is unlikely that Europe’s plan to tax repo and securities lending would go through; France’s example showed how detrimental this would be. However, clearly the ICMA is taking the threat seriously.

Interestingly, this survey attempted to deal with the issue of double counting in the data. This is a very important point and one that impacts our own work of repo market sizing and comparisons to GDP. The ICMA thinks that 7% of its data are double counted; that seems like a small amount. The ICMA aims to continue work on this subject in future surveys.

We see that the survey itself is gaining steam. There were 71 participants this year, nine more than last year with no drop outs. It is fair to say until there is a trade repository in Europe, this repo market survey will be the market standard for this type of data gathering.

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