New pan-European repo index takes shape

New pan-European repo index takes shape

Experts at the European Money Markets Institute (EMMI) have agreed on a methodology to underpin a new pan-European repo index.

Alberto Lopez, EMMI’s senior benchmarks officer, told market participants in Zurich this week that the group has figured out the mechanics for the planned transaction-based euro repo benchmark.

Speaking at the IMCA’s European Repo and Collateral Council Annual General Meeting, he added that EMMI will be inviting firms to give their feedback on the proposed methodology at the end of March.

BrokerTec, EurexRepo and MTS Repo have all contributed historical repo data which has been used to determine the principles behind the index.

Around 95% of repos in the sample were traded with one-day maturities.

It means one-day tenors are sufficiently liquid for a reliable index construction whereas data on long-term maturities is patchy.

Since the introduction of the Euro, the European repo markets have developed significantly, with more and more emphasis on cross border financing trades. 

This has led to an increasingly homogenous Euro-denominated General Collateral ('GC') market.

Pricing and valuation seem to be the most foreseeable potential uses of the new index, which could be a possible substitute of the Eonia index.

Other possible uses are as benchmark of historical performance and internal transfer pricing.

EMMI is talking to STOXX and NEX as potential index providers.

In December, EMMI said the preliminary design of the benchmark will be focused on anonymous ATS executed trades, cleared through qualifying CCPs.

The vast majority of repos in the dataset have fixed rates, although the inclusion of floating rate repos will have an impact on the design of the pan-European secured index.

BrokerTec hosts the largest variety of individual countries.

At Eurex, owned by Deutsche Boerse, historical data shows that the two categories with a meaningful share are Euro and German collateral (showing an increase from about 89% in 2010 to more than 95% in 2015).

At MTS, more than 95% of repos are collateralized with Italian securities.  French repos constitute the second most important group with a share of 2.2%, followed by German repos with 1.3%.

European regulators recently demanded that the London Stock Exchange sell MTS as part of its merger with Deutsche Boerse. 

However the UK exchange publicly ruled out the sale last month, a move which effectively derailed the €29 billion ($31 billion) deal.


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