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Capital Markets

Snapshot of the European repo market

Latest data from the International Capital Market Association and the European Repo Council reveal that the market remains stable, despite "eurozone difficulties"

So, it looks like the European repo markets are holding up, despite the sovereign debt crisis creating a difficult market environment.

The European Repo Council (ERC) of the International Capital Market Association (ICMA) released the results of its latest survey of the European repo market – based on returns received from 64 financial institutions in Europe - giving a snapshot of the volume of repo trades outstanding on a single day in December 2011.

Here are the headline figures from the survey, which measures the amount of repo business outstanding on December 7:

The baseline figure for market size at €6,204 billion. 

Modest growth in the market of 2.6% year on year

contraction in market size of 3.3% from the June 2011 survey using a constant sample. 

Overall, the share of government bonds within the pool of EU originated collateral rebounded in this most recent survey to 79.1% of the market from 74.3% in the previous survey.

The market share of German collateral continued to fall, touching 20.9% of the total (from 24.9% in December 2010), as risk-averse investors became more cautious about lending these safe haven securities.

The share of Italian collateral also fell to 7.0% (from 10.3% in the December 2010 survey) possibly reflecting credit concerns. 

Market users continue to make use of central clearing counterparties to settle their repos in a low-risk environment.

The share of CCP-cleared repos rose to 32% of the survey business, from 30.5% in June 2011.

Transactions of less than one month (so-called ‘short dates’) have dropped sharply, whilst repos of over one-year duration have continued to increase their share of the survey, rising to 12.7% of the total from 9% in the June survey, as banks respond to regulatory pressure and their own concerns over market liquidity by seeking longer-term funding.

The market share of tri-party repo remained steady at 11.4%.

Meanwhile, Godfried De Vidts, chairman of the ERC, said: 

“The survey demonstrates that the European repo market, an essential source of bank financing in Europe, has been able to maintain its stability during challenging market conditions up to the early part of December. The survey was taken ahead of the three-year liquidity provisions of the Eurosystem and anecdotal evidence points to a slowdown in the interbank repo market since. As a community we are sure that the Eurosystem will look at all impacts of this welcome intervention, including the increasing lock-up within the Eurosystem of an important part of the available collateral.”

For more on this collateral, repo markets and financing, check out some of Euromoney's coverage:

IMF's Singh warns of the threat of collateral drought to global liquidity

Global finance: Running on empty

Hopes for reduction in liquidity risk might be flawed

Derivatives reform might stumble on collateral-management hurdle

Macaskill on markets: Downgraded banks face hits from additional collateral payments

MF Global and Lehman Brothers used repo markets as disguise

- Euromoney Skew Blog

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