* New index part of ICAP's broader push into benchmarks
* ICAP has deep pockets to pay compliance costs
* Daily repo index backed by volumes of more than $200 bln
By Emelia Sithole-Matarise and Huw Jones
LONDON, Aug 6 Interdealer broker ICAP
and fixed income electronic trading platform MTS have introduced
a daily benchmark index to track borrowing costs in the euro
zone repo market, a major source of secured short-term funding
in the region.
The move is part of ICAP's broader push into benchmarks by
tapping its pool of market data as the world's biggest broker of
transactions between banks.
It also has deep enough pockets to pay the costs of
complying with new benchmark rules introduced after banks and
brokers, including ICAP, were fined for rigging the London
Interbank Offered Rate or Libor.
The index aims to be a broader benchmark for the region than
the country-specific RepoFunds Rate indices introduced at the
end of 2012. It will form an alternative to the Eurepo index
compiled by the European Banking Federation, whose Euribor rates
reflect lending costs in the unsecured interbank market.
The indices are being developed amid calls for greater
transparency in Europe's interbank funding markets after the
ICAP said it was tapping a gap in the market where leading
index providers such as S&P and Dow Jones had limited offerings
for fixed income and money markets.
Financial institutions use the repo market to borrow cash by
posting collateral, such as government bonds.
"The new RFR Euro index gives euro cash investors,
treasurers, bond traders and bond investors a benchmark for the
whole euro zone, backed by over $200 billion in cleared
transactions collateralised with sovereign bonds," said Oliver
Clark, head of money market and derivatives product at MTS.
The index is based on one-day repo transactions on
BrokerTec, ICAP's global electronic fixed-income trading
platform, and MTS, using government bonds issued by all the euro
zone countries. It will indicate volume-weighted funding rates
using those bonds as collateral.
Trading volumes of eligible repo transactions across the two
trading platforms amount to $230 billion per day, almost 10
times those in the region's unsecured Eonia market. Eonia, the
euro overnight interbank rate, which is based on contributions
from a panel of banks.
Galvanised by its fine for rigging Libor, ICAP is keen to
show regulators and markets that its push into benchmarks
complies fully with principles laid out by the International
Organisation of Securities Commissions (IOSCO), made up of
regulators like Britain's Financial Conduct Authority.
ICAP's indices and benchmark's activities will be conducted
out of a new, legally separate entity that will open next month,
giving it the arm's-length independence that regulators want.
The European Union is also set to approve a new law to
regulate benchmarks that will incorporate IOSCO's principles.
ICAP wants to show it is a step ahead of such mandatory changes.
Interest rate and money market benchmarks and indices are a
key target market, building on the wider ICAP's broad footprint
in markets to feed it data.
(Editing by Larry King)