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Growth in the repo market was estimated at 19% year on year. Most of this growth took place in the six months to June, reflecting recovery in fixed income trading after a slowdown in the latter half of 2003. This latest survey shows that growth in the electronic trading of repo has accelerated and now accounts for almost 24% of total reported business in the market, almost equalling the volume that goes through voice-brokers. This figure includes electronic trading in which counterparties see each other's name and anonymous trading using a central clearing counterparty (CCP) to stand between counterparties. The market share of repo deals transacted anonymously on an automated trading system rose sharply over the year to reach 11.6% in June.
For the first time the survey also includes figures on repo turnover supplied directly by the main automated trading systems in Europe. This additional data reveals that electronic systems dominate trading at the very short and more commoditised end of the market where contracts have remaining terms to maturity of 1 month or less, while direct inter-dealer trading and trading via voice-brokers account for the overwhelming bulk of longer-term and more complex trading activity.
The results of the survey confirm that the share of outstanding repo business in Europe settled though tri-party repo arrangements remained fairly steady after a substantial increase in market share in December 2003 and accounts for 10.9% of outstanding business. (Tri-party repo is a custody solution in which a third-party custodian manages cash and collateral accounts for the repo counterparties - outsourcing the bank’s back office and saving on settlement costs). This kind of repo transaction effectively reduces operational risk – an important consideration for banks in the light of the capital adequacy requirements of Basel II.
Godfried De Vidts, Chairman of ISMA’s European Repo Council, commented: “Repo has assumed even greater strategic significance for financial institutions in Europe as they seek to mitigate the regulatory charge to be imposed by Basel II; the survey clearly demonstrates continued strong growth in the use of repo, as its benefits as a risk management tool become more widely recognised”.
The surveys are conducted by the ISMA Centre at the University of Reading in the UK, at the request of the European Repo Council (ERC), a body established under the auspices of ISMA to promote and represent banks active in Europe’s repo markets. A sample of financial institutions in Europe were asked for the value of their repo contracts that were still outstanding at close of business on June 9, 2004. Replies were received from 81 offices of 75 financial groups, representing the majority of significant players in the European repo market. All institutions who participate in the survey automatically receive, in confidence, a list of their rankings in the various categories of the survey. ISMA’s next repo market survey is due to take place on Wednesday, December 8, 2004.
Click here for the report.
