January 22, 2014 / 10:00 AM / 4 years ago

European repo activity hits four-year lows-survey

* 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 (Reuters) - 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 said.

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 Reading.

“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.

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