August 6, 2014 / 3:11 PM / in 3 years

ICAP, MTS offer benchmark euro zone repo index

* 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 (Reuters) - 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 Libor-fixing scandal.

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)

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