Risk control to the fore as European repo market recovery gathers pace

Risk control to the fore as European repo market recovery gathers pace

The European repo market has bounced back after the financial crisis and is now bigger than in 2007 while risk management is also to the fore with greater use of central clearing counterparties, according to an ICMA survey.

The ICMA (International Capital Market Association) European Repo Council survey of 57 offices of 52 financial groups sets the baseline figure for market size at EUR6,979 billion.

This is a 25% increase on the EUR5,582 billion for the previous survey in December 2009 and also up on the former highest figure of EUR6,775 billion, recorded in June 2007 before the financial crisis.

The market share of electronic repo trading continued to fall, accounting for 22.5% compared to 27.5% in December as the growth in this sector failed to keep pace with the rapid expansion of the overall market. On the other hand, voice-brokers recovered market share, to reach 20.3% from 18.5%.

The survey also shows an underlying shift towards greater use of CCPs for repo business which was until recently largely restricted to that transacted on electronic trading systems.

Over the last two years the post-trade registration of transactions negotiated directly with other parties or through voice-brokers has become "significant", says ICMA. In the survey, post-trade registration of direct or voice-brokered repos through CCPs reached 8.7%. This means that the total share of surveyed repo business - electronic and non-electronic - that was cleared across CCPs was 22.4%.

Godfried de Vidts, chairman, ICMA European Repo Council, says: "The increasing share of central clearing in the European repo market shouldn't make us complacent. There are unresolved clearing and settlement issues in a number of markets which continue to create difficulties in the settlement of bilateral trades and also for electronically originated as well as centrally cleared trades in certain jurisdictions. The ERC is keen to see further progress in the clearing and settlement area through regulatory initiatives like EMIR, as proposed by the EU Commission, but also through continuous work at the ECB chaired COGESI working group."

Vidts' caution is echoed by a report on strengthening repo clearing and settlement arrangements from the Committee on Payment and Settlement Systems (CPSS).

The report analyses the experience of various CPSS member countries with different clearing and settlement arrangements during the financial crisis before identifying issues that have the potential to affect the resilience of repo markets.

You can read the report here:

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