The repo market is already suffering even though some of the new capital rules will not come into effect for another few years, market participants warned at the Euroclear Collateral Conference in May in Brussels.

In a panel addressing balance sheet resources, moderator Michael Manna, head of fixed income financing and money market distribution, Emea, Barclays, said: “Banks are unlikely to wait until 2019 to be fully compliant with new minimum standards for capital and leverage. As a result the system is already shrinking and velocity of collateral is slowing down.”

However, an audience poll revealed that the largest group, 27% of delegates, expected the proportion of their balance sheet allocated to repo to grow marginally bigger over the next two years.

Olly Benkert, head of global repo, interest rate products group, Goldman Sachs International, said: “I’m surprised that many delegates are saying their repo businesses are getting bigger because I would expect that certainly bank-regulated balance sheets would have to come down over a period of time, but maybe that’s over a longer period than I’ve anticipated.”

Indeed, a fifth of delegates said their repo balance sheet would become significantly smaller, closely followed by 19% saying it would become marginally smaller.

Stefano Bellani, MD and head of Emea and emerging markets financing, JPMorgan: “Clearly the business is becoming more expensive, whether that be additional capital or other regulation that’s restricting the intermediation that banks can provide to the market. We are coming off too but not remarkably.”

Benkert asked the panellists how much of the recent volatility in the repo market was due to the scarcity of available capital on intermediaries’ balance sheets.

Sylvain Bojic, director at Societe Generale CIB, responded: “While it is possible, I doubt that we’ve observed in the past few weeks has been linked to balance sheet constraints. Rather, it’s linked to funding or treasury issues.”

When asked whether the central banks should intervene to address the volatility, Benkert said: “I don’t think the view is that central bankers should get involved as they recognise that market forces are good thing. But there is an understanding that a re-pricing of repo and therefore a re-pricing of bond markets to some extent, which is a cost to taxpayers, may be a deal worth doing in exchange for resiliency of the financial system. Some of that pricing has yet to be seen in the market.”


Click on the hyperlinked titles below to read more coverage from the Euroclear conference:

- Appeal of collateral downgrades to fall

- Beneficial owners fear onerous regulation

- Poll: regulation casts gloom on securities lending