European repo leader wary of transparency

The European repo community appears to be worried that regulators will require the repurchase market to become more transparent, based on a top repo official’s comments in a Financial News column June 13.

Godfried De Vidts, chairman of the European Repo Council, said he is concerned that regulators may favor processes like electronic trading and central clearing, which would improve transparency in the largely unseen market, as one way to help prevent another financial crisis.

It seems that transparency, both pre- and post-trade, is the panacea that will give regulators the view of financial markets activities they need, which will in turn help us avoid another crisis.

But one result could be that the repurchase market could become less efficient and less effective, he wrote. 

Many repurchase agreements are arranged bilaterally, between private parties, and little information is available even about those that are centrally cleared, for competitive reasons and for ease of execution. The opaque nature of the market was an impediment to regulators when they tried to assess systemic risk during the financial crisis of 2007-2008.

De Vidts said the repurchase market is a key way that financial markets in the European Union get the cash they need to operate, and officials who are developing the rules to govern this market must be mindful of unintended consequences.

The fixed-income market segment known as the repo market will continue to be the major source of liquidity through the use of a broad range of collateral, facilitating sound management of exposures in a range of products. Central banks have chosen the repo markets as the transmission mechanism to provide liquidity to the financial markets. The repo trading community shares responsibility for funding the banking system, acting as the link between central banks and the real economy. Safer markets will require more collateral; but without an efficient repo market the mobility of good quality collateral is harder to achieve.

The De Vidts column shows the fine line that central bankers must walk in regulating a market that is used both by central banks for executing monetary policy and by traders for speculation.

Presumably, a less efficient repo market would mean less control of monetary policy by central banks and less profits for financial institutions.

A repo market is being developed for the European Union under the Markets in Financial Instruments Directive, to provide a single European market for financial instruments and investment services. From De Vidts’ column:

One challenge of Mifid is to avoid damaging the relationship between the secured lending of cash and efficient financing of dealer inventory at the heart of repo markets.

The European Repo Council, an arm of the International Capital Market Association, is a trade group that studies and lobbies for repo issues, promotes repo use and collects repo data. The U.S. does not have a similar group, and as a result the U.S. repurchase market is less well understood than its European partner.