ICMA Publishes European And Asian Repo Surveys
European repo market
The European Repo and Collateral Council (ERCC) of the International Capital Market Association (ICMA) has today released the results of its 39th semi-annual survey of the European repo market. The survey, which calculated the amount of repo business outstanding on 10 June 2020, from the returns of 61 financial institutions sets the baseline figure for European market size at EUR 7,885 billion down from the record high of EUR 8,310 billion in the December 2019 survey.
The latest survey took place after the market turbulence triggered by the COVID-19 pandemic, in February and March (for a detailed assessment see ‘The European repo market and the COVID-19 crisis April 2020’) which stabilised in April following the fiscal response by governments and emergency liquidity support from central banks. However, the June survey shows clear traces of the impact of central bank asset purchases and other demand for high quality assets during the crisis. The repo market plays a key role in collateral transformation from one type of security to another. During the market turbulence, despite regulatory constraints, the repo market also provided a resilient source of funding and safe-haven for investors.
Increased asset purchases by the ECB and enhanced financing under TLTRO III facility contributed to a reduced use of a number of EU government securities as collateral, which was reflected in the fact that UK government securities, which have been subject to relatively less purchases by the Bank of England, now provide the largest pool of collateral in the European repo market.
While the survey showed continued contraction of the share of automatic electronic trading, data reported directly to the ICMA by the trading platforms showed 30% growth, suggesting that there has been strong growth in electronic repo between firms not in the ICMA survey, which probably means smaller banks, who are either new or previously light users of electronic trading. There is anecdotal evidence to support the suggestion that automation was accelerated by the hectic trading which was triggered by the Covid crisis. This is also evident in the strong growth in automated trading (using requests for quotes), which is reported in the survey as direct trading.
Compulsory reporting under the EU Securities Financing Transaction Regulation (SFTR), began on 13 July for virtually all entities established or located in the EU of all securities financing transactions (SFTs), including repos. ICMA aggregates and publishes the data from the trade repositories on its website. By October, this aggregated figure had reached EUR 13 trillion. While the SFTR data covers the whole EU market, the ICMA data covers a significant part of the European market and gives a great deal more detail on market structure. The advent of SFTR reporting may also have contributed to increased use of electronic trading platforms, which provide a convenient way of digitizing transaction details for processing into reports.
Gareth Allen, Chair of ICMA’s ERCC said: “The ERCC Repo Survey has been the main window onto the European repo market for twenty years, providing a comprehensive overview of market trends, structure, and dynamics. In the wake of SFTR it is great to see that the headline numbers from the ERCC Survey align. The relatively limited public data coming from SFTR also highlights the importance of the ERCC Survey and suggests that it will remain a key market resource for many years to come.”
Asia-Pacific repo market
ICMA’s European Repo and Collateral Council (ERCC) and ASIFMA have published the results of a second survey of the Asia-Pacific repo market. Using similar methodology to the long-established ICMA ERCC European repo market survey, the latest Asia-Pacific survey reports the value of repos and reverse repo on 10 June 2020.
The report has been split into two parallel surveys, one for the repo market in Japan and the other for the repo market in the rest of the APAC region. The Japan survey reported an outstanding value on June 10 of USD 215.7 billion and average daily turnover over the previous six months of USD 192.4 billion, with an average deal size of about USD 260 million.
The non-Japan Asia survey reported USD 216.7 billion in outstanding value and average daily turnover was USD 73.1 billion, with an average deal size of some USD 71 million.
Commenting on the survey Martin Scheck, ICMA Chief Executive said: “Building on the lessons of the pilot in 2017 this current survey is intended to be the start of a regular annual survey of the cross-border Asian repo market which together with semi-annual European repo surveys will give a broad and detailed picture of this developing and increasingly vital financial product for our global membership”.
Philippe Dirckx, Managing Director – Fixed Income, ASIFMA said “This report provides a unique mapping of the Asian repo landscape for ASIFMA and its industry members to identify, discuss and advocate how secured funding can become more prominent in the region and enable seamless access to collateral and liquidity”
Main survey findings
- For reporting banks outside Japan, most of their counterparties were located in Europe and other regions outside Asia (probably the US) and the bulk of reported repo business outside Japan was cross-border.
- The overwhelming share of reported repos was executed directly between parties by telephone and electronic messaging. Voice-brokers played a more significant role in Japan than elsewhere in APAC. Automatic and automated trading was very limited.
- CCP-clearing accounted for most of the Japan survey but little of the remaining APAC survey.
- The Japanese yen predominated in the Japan survey, with the remaining business mainly in US dollars, euros and Australian dollars. While the yen was important in the rest of APAC, the predominant currency was the US dollar, with significant business also in Australian dollars and euros.
- The Japan survey was dominated by gentan repo, which means it was very different to the composition of the Japanese market as reported by the Bank of Japan and the JSDA (mainly gensaki). The non-Japan Asia survey was overwhelming in repurchase transactions and most of the remainder was documented buy/sell-backs. Chinese pledged repo had a small share.
- Almost 89% of APAC transactions (excluding Japan) were documented under the GMRA.
- All the reported transactions in the Japan survey were fixed-rate. In the rest of APAC, the proportion of floating-rate and open repos were similar to that in Europe.
- The maturity distribution of the Japan survey was similar to that of the ICMA European repo survey with two exceptions: forward repos were even more prominent in the Japan survey; and there was minimal business beyond three months in the Japan survey.
- As expected, Japanese securities dominated the Japan survey with small shares in US Treasuries and eurozone non-government securities. In the rest of APAC, Japanese securities were also the largest component but there was a much more diverse pool of collateral, with significant shares in Australian securities and US Treasuries, and material business in bonds issued by IFIs, other APAC issuers, eurozone governments, Chinese issuers, US non-government issuers and Singaporean issuers as well as in equity.
The number and size of margin calls can contribute to stress in the financial system in extreme volatility.
The manual process for selecting ETFs as collateral was often inefficient, cumbersome and reactive.
Clearinghouse-mandated deposit requirements for equities increased ten-fold.
HQLAx uses distributed ledger technology for securities lending and collateral management.
Clearing helps participants reduce costs for posting initial margin under the Uncleared Margin Rules.