Mapping the European Repo Market

The European interdealer repo market can be usefully mapped at three levels of activity:

  • trading — the negotiation and execution of transactions;
  • clearing — the netting by counterparties of (1) opposite obligations to deliver the same security (same ISIN) to each other on the same day and (2) opposite obligations to pay cash in the same currency to each other on the same day, which results in a smaller residual delivery obligation and a smaller residual payment obligation;
  • collateral management — the selection of specific security issues to deliver as collateral and the maintenance of that collateral.[1]

There is a fourth level of activity — the settlement of securities transfers and any related cash payments — but, as there is considerable and increasing choice available to trading venues, clearing systems or collateral management agents about which settlement and payment systems they can use, differences between the settlement and payment systems used by dealers are not a particularly useful way of analysing the European repo market.[2] [3]

There is also a fifth level of activity — the post-trade, pre-settlement affirmation of transaction details and settlement/payment accounts — but this also is not a useful way of differentiating repo activity.[4]

The trading map

Repo can be traded through a variety of old and new technologies:

  1. Telephone or electronic messaging systems.
    • The use of telephones or electronic messaging systems is called direct trading, in that the technologies do little more than allow parties to communicate directly, by voice or in free-form text.
    • Telephones and electronic messaging systems are also used by voice-brokers in Europe are BGC (Partners), GFI (Group), ICAP, Tradition and Tullett Prebon.[5
  2. Automated trading systems. Some voice-brokers operate networks of interactive screens. Dealers can enter prices directly and the voice-brokers can enter transactions that have been negotiated by telephone into the systems. These systems are automated but not automatic, in that transactions cannot be executed and settlement cannot be initiated and completed automatically by clicking on a screen. Additional action is required from the counterparties before transactions can be consummated, eg credit approval, further negotiation on terms such as collateral haircuts, and the despatch of settlement and payment instruction.
  3. Automatic trading systems (ATS). These are dedicated networks of interactive screens on which prices are displayed for repos of various tenors, amounts and types of collateral (individual issues or classes or special baskets of securities). ATS are automatic in that transactions can be executed and settlement can be initiated and completed automatically by clicking on an interactive screen (this straight-through processing is possible because of operational and legal links between the ATS and the entities in the next stages of the clearing and settlement process, ie clearing systems, collateral management agents, and CSDs or ICSDs.[6] The ATS operating in Europe are:
  • BrokerTec, which is based in the UK and owned by ICAP Plc; it is the leading ATS in Europe for repo other than of Italian securities;[7]
  • Eurex Repo, which is based in Germany and part of Eurex Exchanges, owned by Deutsche Borse AG; Eurex Repo operates three repo market segments: (1) Euro Repo Market, (2) Swiss Franc Repo Market (which dominates the electronic trading of Swiss franc repos); and (3) Euro GC Pooling Market
  • HDAT, which is based in Greece and operated by the Bank of Greece; limited to Greek government bond repo; it suffered a collapse in volume in 2011, when the European sovereign bond crisis erupted.[8]
  • MTS Repo (sometimes known as the Telematico), part of MTS Group, which is based in Italy but majority owned by the London Stock Exchange Group; claiming a 90% share of the Italian repo market, with small volumes in other markets;[9]
  • SENAF, which is based in Spain and owned by the BME Group, with a largely domestic membership; since 2011, it has seen no volume in repos.[10]

The clearing map

Repos can be:

  • Uncleared — this would now be unusual for dealers, given that netting is a standard feature of repo master agreements.
  • Bilaterally-cleared — a party nets opposite delivery and payments obligations separately with each of its counterparties, to produce a set of smaller residual delivery and payment obligations with each counterparty (one in each security and currency).
  • Multilaterally-cleared — at the inception of a transaction between member firms or shortly after execution, a central clearing counterparty (CCP) is inserted into the middle of each transaction to (1) become the high-quality buyer to the seller and the high-quality seller to the buyer and (2) net opposite delivery and payments obligations between itself and each member firm, resulting in one set of smaller residual single delivery and payment obligations between the CCP and each member firm (rather than a separate set between each pair of counterparties).

The CCPs which are currently clearing repos in Europe are:

  • CC&G, which is based in Italy but owned by the London Stock Exchange; its repo clearing business is drawn entirely from MTS and is limited to Italian government bond collateral.[11]
  • Eurex Clearing, which is based in Germany and owned by Deutsche Borse AG; it only clears repos transacted across Eurex Repo (which in turn only uses Eurex Clearing).
  • LCH.Clearnet Ltd, which is based in the UK and part of LCH.Clearnet Group Ltd, which is majority owned by the London Stock Exchange; its repo clearing business covers a wide range of European government securities.
  • LCH.Clearnet SA, which is based in France and part of LCH.Clearnet Group Ltd; its repo clearing business is in French government bond repo and, to a lesser extent, Italian and Spanish government bond repo; it operates a link to CC&G.
  • MEFFRepo (formerly MEFFClear), which is based in Spain, is the business name for the fixed-income clearing segment of BME Clearing, which is the CCP owned by the BME Group; its repo business is limited to Spanish bond repo transacted across SENAF or arranged through voice-brokers and registered with the CCP post trade.[12] [13]
  • CJSC JSCB National Clearing Centre (NCC) operated by the Moscow Exchange Group in Russia.

There is talk of repo CCPs being established in the Nordic region (by Nasdaq OMX), Poland (by KDPW_CCP) and Spain (by Iberclear), but there is little evidence so far of substantive progress.