The new ICMA European Repo Market survey has just been released. Covering data collected in June, 2012 it is a good top-down look at market trends. Here are some things we picked out that were interesting.
Some of the data is a little hard to digest since there is double counting as well as participants dropping out and/or coming into the survey. But here it goes:
The market contracted by 14.2% year on year, using numbers that compare aggregate gross outstanding transactions made by institutions that have been participating in the last several surveys. The market was Euro 5.647 bio in June 2012; well above the Dec. 2008 low of Euro 4.633 bio. The repo books of 30 of the 62 institutions surveyed shrank.
Electronic trading grew to a 33% market share, largely at the expense of voice brokered flow. The report noted that voice brokering had gained market share in the crisis; voice brokers were better at searching out pockets of liquidity than electronic platforms. We wonder if the push back toward electronic trading may be a sign that sourcing idiosyncratic sources of liquidity may not be as important. That is probably a good thing.
Anonymous electronic trades, typically cleared through CCPs, grew to a record 18.8%. This reflects a trend toward centrally cleared transactions due to cost and capital reasons as well as greater risk aversion. However when looking at CCP-cleared trades executed across Automated Trading Systems (ATS), trades via a voice-broker, or transacted directly with counterparty, the percentage fell slightly from 37.4% to 33.6%. According to the report, the reduction was a surprise, attributed to the possibility that longer dated structured trades, which are becoming more common, may not clear through CCPs.
The share of Euro denominated transactions fell to 57% (from 63.5% a year earlier), along with a fall in Swiss Franc and Japanese Yen trades. The beneficiaries were US$ and GBP trades (with their shares up 3.2% and 5.5% in a year, respectively). The fall in Euro trades is thought to be a function of the LTRO taking out large amounts of Euro-denominated paper. The LTRO is also cited as a reason for the overall market shrinkage.
Short dated repo rebounded slightly to 49.9%. The share of trades over a year to maturity remaining rose to a record 13.3%
German collateral use is expanding in tri-party trading, but decreasing in the wider market. An explanation offered was that market participants are reluctant to lend German paper on a DVP basis when they are afraid it won’t be returned. Using tri-party controls that risk since the paper cannot be further re-hypothecated.
There is a shift to more highly rated collateral in tri-party trading, with “AAA” and “AA” paper (combined) rising to 68.5% from 63.6% in Dec. 2011. On the other side of the rating spectrum, A rated collateral fell from 23.1% to 9.4% but “BBB” paper rose from 3.2% to 12.7%. The “A” to “BBB” shift was attributed to the downgrade of Spain and Italy, shifting collateral in tri-party from one ratings bucket to another.
There was a lot of information to digest and we certainly didn’t get it all. A link to the report is here.