11 March 2013

ICMA: LTRO continues to weigh on European repo market

The European Repo Council of the International Capital Market Association (ICMA) today released the results of its 24th semi-annual survey of the European repo market. The survey, which measures the amount of repo business outstanding on 12 December, sets the baseline figure for market size at €5,611 billion.

Godfried De Vidts, Chairman of ICMA’s European Repo Council, said: “The survey results demonstrate the continued existence of a robust European repo market; however the future of this market is in jeopardy. The European Commission’s latest proposal for Financial Transactions Tax comes at a time when the Basel Committee has guided interbank lending transactions away from an unsecured to a secured basis and when wholesale market participants, together with the Central Bank community, have moved to the repo market because it is the safest way of distributing liquidity throughout the European banking system. The FTT proposals to tax repo transactions put the economic viability of repo, including triparty, transactions at significant risk, which will lead to less liquidity provision to the real economy.”

On the issue of potential collateral shortage, De Vidts said: “The FTT proposals also put at risk the implementation of EMIR, which requires the use of collateral for centralised and bilateral clearing. As ESMA highlighted upon release of its first EU securities markets risk report on 14 February: the collapse of unsecured markets during the financial crisis, as well as regulatory initiatives, have led market participants to rely increasingly on collateral as a means of mitigating counterparty risk, stimulating the demand for collateral. Additional demand for collateral will exceed the additional supply of collateral in 2013-2014, making collateral comparatively scarcer.” He added: “If the FTT on repo transactions (which facilitate collateral being available where it is needed) goes ahead, the regulatory collateral crunch will actually materialise. Is that what we really want to happen?”

Full survey

To read the full press release, please click on the link below.

© ICMA