ICMA blames regulation for chilling effect on EU repo market

Measures such as the Leverage Ratio and the Bank Recovery and Resolution Directive have made for an overcautious climate, says group

A wave of regulation has had a chilling effect on the European market in repurchase agreements, or repos, according to the International Capital Market Association (ICMA).

In a new survey, the group pointed out that EU-based repo trade added just 2% of financial growth in the first six months of the year, reaching €5,612bn – yet overall activity, in terms of the number of deals, declined by 2.9%.

Those figures continue a pattern established over the most recent surveys from the ICMA’s European Repo Council, indicating an apparent stability. But up to the dawn of the financial crisis, regional repo growth was as much as 10 times greater.

In a statement, the Council’s chairman Godfried De Vidts said: “The stability of the headline figure over the last few surveys does not tell the full story. The repo market in Europe is not growing in line with underlying conditions.

“Increased bond issuance, extraordinary excess liquidity from long-term refinancing operations and quantitative easing, and increasing demand for collateral driven by regulation, might reasonably have been expected to produce an increase in repo trading.”

However, he added: “The secured financing business is already facing significant pressure as the implementation of regulatory initiatives such as the Leverage Ratio, Net Stable Funding Ratio, Central Securities Depositories Regulation and Bank Recovery and Resolution Directive begin to bite.

“A further qualitative study on repo in Europe, to be released next month, will give us greater insight into the profound changes underlying these aggregated figures.”

In further comments to Bloomberg, De Vidts took a less-guarded tone, saying: “The European repo market doesn’t look very good. The actual state of health of the market is disguised by the excess liquidity that the banks have given current monetary policy.

“Bank lending is essential, but it is not happening. The banks are still deleveraging, particularly in continental Europe. Putting that all together, it doesn’t paint a pretty picture.”

While the share of government bonds within the pool of EU-originated, fixed-income collateral fell from 81.5% to 77%, market activity involving direct transactions jumped from 54.9% to 57.5%.

On those figures, the survey concluded: “These changes may be a sign of banks responding to leverage and liquidity regulations by allocating more of their balance sheets away from commoditised, short-term, electronically traded, interdealer repos of government bonds – where margins are thinnest and banks are least able to recover increased transactions costs – and towards directly negotiated, longer-term, sometimes customised transactions with end users.”

Download the full survey

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