Chapter 3: Conclusion Activity in the European repo market continued to be buoyant. Among the drivers was new issuance by many governments, which was up in both gross and net terms compared to the second-half of 2020 (although lower than in the first-half of 2020). Higher issuance was reflected in increased secondary cash market turnover in several countries, notably France and Italy (MTS bond trading more than tripled in May), and would have fed the repo market. Increased repo trading also reflected heavy short-selling in anticipation of possible interest rate rises in the UK and a start to the ‘tapering’ of QE in the eurozone. Short selling was reported to have aggravated collateral scarcity arising from QE. Net asset purchases under the Pandemic Emergency Purchase Programme (PEPP) picked up pace and increased Eurosystem holdings of securities by EUR 557.2 billion over the first half of 2021, a rise of 45.2% compared to the second half of 2020. That the market was securities-driven was confirmed by the increase in turnover on Eurex Repo (which trades both GC and specific/special repos) and the coincident decrease in turnover on GC Pooling. The major exception to the picture of increased activity was repo against German government securities. Secondary market trading weakened and both the share and value of German government securities contracted. Market participants attributed this hiatus mainly to QE, exacerbated by constraints on the programme operated by the Bundesbank through which the repo market can borrow German government securities purchased by the Eurosystem. A contrast has been drawn with the more accessible securities lending programme of the Banque de France, which could have contributed to the strong growth in the share and value of French government securities in use as collateral. The value of trading on interdealer automatic trading systems (ATS) declined but its share of the survey increased, suggesting that survey participants were more active users of electronic platforms, which is what would be expected given that the survey includes the largest dealers in the European repo market. The fall seen since 2016 in the value of CCP-cleared automatic electronic trading was halted and its share of the survey increased, which seems to confirm that the reduction in the share of anonymous trading continues to be due to faster growth in uncleared business rather than any weakness in the demand for CCP-cleared repo. The value of automated electronic repo trading continued to grow strongly, reflecting the continued impact of ‘working-from-home’, the onboarding of new users and incremental flows facilitated by additional functionalities. Another factor may have been the Unclear Margin Rules (UMR), which have increased the use of repo by buyside firms, both directly and by encouraging a shift away from synthetic repo (which are subject to UMR). The share of voice-brokers fell back, in part, as a result of a decline in forward repos, which is core to voicebrokers’ repo business, but perhaps also a resumption in the secular decline of voice-broking in the repo market. The share of tri-party repo contracted, as did the outstanding value of tri-party repo, reflecting the continued crowding-out of GC repo by central bank liquidity. However, the GC financing facility segment of the tri-party market expanded. GC financing may have benefitted from the attraction of higher returns for cash investors in the repo market compared to money market funds, the precautionary diversification of funding sources by buyside firms worried about future scarcity of bank balance sheets (particularly in the face of the liquidity risk they face because of the UMR) and the attraction of netting across a CCP.
European Repo Market Survey - November 2021
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