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German: Grim repo

German repo-traders are besieging the Bundesbank with complaints that its minimum-reserve requirement is killing their business. But, asks Laura Covill, will things get any better if the Bundesbank relents?

"It's starving us out." "It's squeezing us dry." "It just doesn't understand our problems." This is what you'll hear if you ask the average German repo-trader what he thinks of the central bank. Next will come the wistful remark: "This market could easily be three times as big."

What so incenses these traders is the Bundesbank's insistence that repos be subject to the same minimum-reserve requirements as sight demand deposits.

In any country, a repo involves an agreement to sell securities immediately and repurchase them later. The party originally holding the securities pays a return to the counterparty to compensate for what is, in effect, a cash loan. In Germany, however, it must also lodge 2% of that loan with the Bundesbank free of interest. According to Michael Braumöller, head of treasury at Salomon Brothers in Frankfurt, this 2% rule is enough to drive business away from Germany. "The minimum reserve creates a cost of 8 basis points [bp]. When I have to forego 8bp, many trades can easily turn into loss-making deals."

About 50 banks claim to engage in Deutschmark repo business, but the leading banks say only about 10 to 15 are genuine
players, and they are doing more and more of their business in London.

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