* European repo market shrinks 8 pct in H2 2013
* ECB cash, upcoming regulation hit activity - survey
* Still off 2008 low but well off pre-crisis peaks
By Emelia Sithole-Matarise
LONDON, Jan 22 The European repo market shrank 8
percent in the second half of 2013 to its smallest in four years
as European Central Bank cash injections towards year-end and
future regulatory concerns curtailed bank activity, a survey
Falls in the repurchase agreement market, a major source of
funding for financial institutions, raises concerns that
upcoming regulatory changes may squeeze trades and loans that
keep economies running.
According to a survey by the European repo Council of the
International Capital Market Association (ICMA), a snapshot of
the value of outstanding repo contracts showed the market at
5.499 trillion euros ($7.45 trillion) at close of business on
Dec. 11 compared with 6.076 trillion six months earlier.
This is still above a record low of 4.633 trillion hit in
December 2008 as the financial crisis roiled markets but well
off a pre-crisis peak of 6.775 trillion in the June 2007 survey.
The survey, using data from 68 financial groups, however
showed the share of euro-denominated business recovering to 66.3
percent from a low of 57 percent in June 2012, probably
reflecting the strength of the underlying bank trend back to
market funding as the debt crisis ebbs.
"The contraction of the market would seem to be the result
of the usual shrinkage of repo books at year-end plus the impact
of the liquidity offered by the ECB in December in order to
relieve any seasonal funding shortages," said Richard Comotto,
senior visiting fellow of the ICMA Centre at the University of
"It may also have been driven by the anticipation of future
regulatory constraints in short-term wholesale funding," said
Comotto, who authored the survey.
The survey highlighted a rise in the share of Italian
collateral used to 38.7 percent from 32.6 percent. There had
been concerns in the market that a move late last year by
clearing house LCH.Clearnet SA to drop a guarantee on repo
transactions on Italian government bonds might cut off a key
funding channel for the country's smaller banks.
Electronic trading lost market share, with the outstanding
value contracting to 936.7 billion euros from 1.059 trillion as
banks preferred cheaper ECB funding to tidy them over the turn
of the year.
The survey showed a "surprise" increase in the share of
anonymous electronic trading via central clearing counterparties
(CCPs). CCPs allow banks to trade repos anonymously, assuming
the members' counterparty risk.
Of the electronic trading surveyed, 94.7 percent was cleared
via CCPs though the authors warned this was an increasing
percentage of a smaller market share and could have been skewed
by respondents breaking out their general collateral financing.