BNP Paribas and Citi see repo upside

BNP Paribas and Citi see repo upside

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The repo market may be on the verge of regaining some of its former profitability, after a period of regulation-induced malaise under the Net Stable Funding Ratio (NSFR). 

IMF senior economist Andreas Jobst highlighted the troubling influence of regulation on the repo market at Clearstream’s 20th Global Securities Financing summit this week – but market participants were far more upbeat.

As repo has become increasingly uneconomical over the past 18 months, providers generally deleveraged and downsized their repo desks. Some have folded the service into other desks and only continued offering it as a loss-leader in support of more profitable services.

Jobst highlighted the German GC repo market as an example of a market in which rates had fallen below the deposit rate, making the service utterly unprofitable.

He offered hope for a recovery in the market however. While implementation of various “risk-insensitive regulations” has harmed repo rates, he indicated that smarter regulation that recognises the cost of risk and potential damage to collateral liquidity could mitigate the current trend.

Jobst emphasised the importance of CCP interoperability in allowing repo markets to function optimally.

However, not all the speakers at the conference were quite so negative.

Both Eugene McGrory, head of the European repo division at BNP Paribas, and Citigroup’s global head of fixed income finance, Grigorios Markouizos, reported spread returning to the market.

“We have seen a lot of spread return to our markets,” Markouizos said. “We are using less balance sheet and making more money.”

“For the first time in many, many years I can see an upward slope of earnings for our business going forward.”

McGrory went further, stating that banks, “have to change with the times, and provided they do that, it’s still a very profitable business.”

He blamed an inertia in the industry around preparing for regulation for the apparent lack of profit available to other banks. While other banks are suffering, regulatory frontrunners could maintain profitable operation.

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