In a recent DerivSource podcast, Richard Comotto of the ICMA Centre offered his key takeaways of a recently published 29th semi-annual repo markets survey and he warns 2016 could be the year where the repo market shifts from slow decline to sudden descent.
The key takeaway from the semi-annual survey is that currently the European repo market is flatlining and trending down slowly. For me, the key question is whether that slight sideways or downward trend we’ve seen in the repo markets in Europe since 2010/2011 is going to shift to a sudden descent similar to what we’ve seen in the US market. This shift is likely to take place if and when the full weight of regulation reaches a critical point at which point many banks will decide either to exit the repo business entirely or to severely curtail their activity. At the very least, banks will become very selective about what sort of business they do and with whom, and this change, combined with those exiting the repo market, will culminate in a sharp dip in the market. This means of course that for customers of banks, it is going to be much more difficult to access the repo market through any bank.
If this rapid decline does happen, then there are going to be knock-on effects on the liquidity of securities markets and derivatives markets, which will be visible in the next year, may lead to some official reappraisal of the weight of regulation and regulatory approach because it will be difficult with a shrunken repo market to issue government debt in large quantities as efficiently as it is done now. Governments are going to be asking why they’re paying more for their money and companies are going to be telling regulators they cannot raise money cheaply any longer. Also, initiatives such as the European Capital Market Union, which is intended to encourage companies to move away from bank financing and issue corporate bond, will be undermined by this inability to issue corporate bonds.
We may see the market sitting back and waiting and seeing what happens with new regulation and the impact on the repo markets because in reality, no one is going to be in a rush to unwind the regulatory measures of the last few years, but the effect, when it comes, could be quite dramatic.
* To hear Richard Comotto’s full comments on the topic, please listen to the DerivSource podcast or read the transcript.
