Our reading of the ICMA’s latest European Repo Survey (Premium)

ICMA released their latest European Repo Market survey on Feb 11 2016, showing that the EUR 5,607.7 billion market is evolving in some expected and unexpected ways. We read through and found some implications underneath the top-level summary findings.

1) Issues in data collection. The ICMA survey is a voluntary submission of data from banks in the repo space. This time around, 72 offices of 68 institutions participated. This makes the ICMA survey the best data source for European repo activity in the market, by far. However, what to submit can be interpreted differently by different market participants. This has been a problem in historical data from tri-party collateral managers, as noted in the latest publication:

The share of tri-party repo recovered to 11% from 10% but some of this increase may have been due to improvements in reporting by several banks. The outstanding value of tri-party repo reported directly by the major tri-party agents in Europe (ie all tri-party business, not just that by the institutions in the survey) dropped sharply and substantially. However, this was largely due to a fundamental correction in reporting by one of the tri-party agents, who previously been including some securities lending and borrowing transactions. The correction seems to have had knock-on effects on the reported composition of other tri-party business, so care is needed in interpreting these data.

The correction to the total value of tri-party repo business is probably reflected in the sharp drop in the reported share of equity collateral to 7.8% from 25.6%, as most equity collateral is used in securities lending and borrowing rather than repo.

While the survey showed tri-party government bonds jumping sharply as a percentage of collateral, we think it is best to wait until the next survey before deciding whether this is a trend or just cleaning up the reporting coming from tri-party providers, particularly the one firm that was including securities lending and borrowing.

As European governments start collecting and analyzing data in Securities Finance Trade Repositories, we may find that the ICMA data are superceded by these new data sets that cover more of the market in potentially more detail. On the other hand, it is just as well possible to think that governments will use different definitions of repo and Securities Finance Transactions altogether, which would go far to maintain the relevancy of the ICMA survey well into the future.
The ICMA study also notes that the data do not cover transactions with Central Banks, “which continue to be very substantial.”
2) An expected contraction at large banks. European repo is fighting against so many headwinds that a shrinking market comes as no surprise. The problems are most acute at banks needing to manage their balance sheets. According to the survey:

Using a constant sample of banks to eliminate the effect of changes in the survey sample, it is estimated that the market contracted over the previous six months by 1.4%, although the year-on-year change was +3.1%.

The latest decline in activity reflected in part a contraction in repo books by G-SIFI, which are the banks most intensely impacted by new regulation. On the other hand, non-EU banks provided an expansionary impetus.

Part of the size of the contraction was that a small number of G-SIFIs reduced their repo books in larger proportions than other market participants. If one big player makes a structural change and leaves the market, that is going to show up as a bigger data change than smaller players doing the same thing. So is the market contracting? Yes, but the data show that other players may step in to fill the void. Since the ICMA survey only covers banks, we can’t see what Shadow Banks are doing, but the data suggest that they may have a opportunity to step in.

The overall decline in the size of the survey was driven mainly by a reduction in repo (cash borrowing), rather than reverse repo (cash lending).

While the ICMA data are limited to banks, the EU/non-EU split shows clearly the impact of regulation and probably Quantitative Easing, but that is hard to tell for certain. Taken together, it is no surprise that the size of repo books continues to hover between flat and on a downward trend.
3) A rise in centrally cleared trades. The ICMA survey shows that while the number of market participants using electronic trading platforms has about stayed the same for the last several years, the percentage of business they are doing has risen. Likewise, the total business volumes reported by ATSs in Europe declined slightly while their share of the market has grown.

Anonymous (ie CCP-cleared) electronic trading increased both its share of the survey and its absolute size, confirming the trend towards central clearing.

The share of all CCP-cleared transactions (including the 23.6% that was electronically traded) jumped to 31.0% from 27.2%. (The graphic below shows where the CCP-cleared business is coming from.)

ICMA Feb 2016 CCP repo volumes

The benefits of a 2% risk weight on a CCP versus something much larger for a bilateral counterparty are impossible to ignore. We ran the numbers in our December 2015 research report, “Regulatory Costs of OTC Derivatives vs. Securities Finance Transactions.” We’ve also heard more lately about the benefits of straight-through processing as an efficiency measure, particularly in user comments on EquiLend’s NGT in this case study.
4) Other stuff. A few additional observations:

  1. While the maturity of repo trades seems about constant, the survey does not provide a cross-correlation on maturity vs. platform. We see for example that 86% of ATS trades are overnight and 17% of tri-party is overnight, but we don’t have enough published detail to link back term with balance sheet impact.
  2. The survey notes that “the post-crisis shrinkage in the market may be bottoming out… Most major banks already conform to the new liquidity and leverage regulations.” However, “there is some uncertainty still about the precise impact of the Net Stable Funding Ratio (NSFR).”
  3. “The latest survey con rms the long-term upward trend in CCP-cleared repo.” This suggests that securities lending and borrowing will be on a similar track once CCP operators iron out their business models a bit more.

The ICMA survey remains a very important touchstone for understanding the size and scope of the European repo market. This latest publication shows some trends and the difficulty of data collection in a market that may be unstandardized.

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