Repurchase transaction (Repo)
European Union Electricity Market Glossary





Pursuant to Article 3(9) of the Regulation (EU) 2015/2365 of the European Parliament and of the Council of 25 November 2015 on transparency of securities financing transactions and of reuse and amending Regulation (EU) No 648/2012 (SFTR) 'repurchase transaction' means a transaction governed by an agreement by which a counterparty transfers securities, commodities, or guaranteed rights relating to title to securities or commodities where that guarantee is issued by a recognised exchange which holds the rights to the securities or commodities and the agreement does not allow a counterparty to transfer or pledge a particular security or commodity to more than one counterparty at a time, subject to a commitment to repurchase them, or substituted securities or commodities of the same description at a specified price on a future date specified, or to be specified, by the transferor, being a repurchase agreement for the counterparty selling the securities or commodities and a reverse repurchase agreement for the counterparty buying them.



Measured either by turnover or notional outstanding, repos are the main type of SFTs used in the EU.


Quarterly turnover in the secured segment (i.e. repos) of EUR money markets amounted to almost EUR 30tn over the last five years.


However, this figure excludes the sizeable UK gilt repo market for which no turnover data are available.


In terms of notional values, a frequently-cited industry survey puts the gross notional amount of repos at EUR 5.6tn as of December 2015.


The Bank of England publishes notional outstanding data on the UK gilt market. The gross amount of repos outstanding is around GBP 500bn, in line with the findings of the industry survey mentioned above.


One noteworthy trend is the downward trend in repo volumes reported by banks, while European repo markets were largely interbank, in contrast with the growing volumes reported for other types of market participants.


According to the industry survey, which includes both Euro area and other EU countries, around 90% of repo transactions are collateralised with fixed income securities, with the very large majority issued by sovereign, quasi-sovereign or supranational entities.


More than half of the pool of fixed-income collateral originated from Germany, UK, France and Italy.


Repos can be traded bilaterally, with or without CCPs, or through tri-party agents which take care of post-trading services, including the allocation of collateral across clients.


While the bilateral repo market is essentially interdealer, tri-party repos take place between dealers and customers.


In the tri-party repo market segment (around 10% of EU markets), usually used for financing purposes, the pool of collateral tends to be more diversified with sovereign debt accounting for around half of the total, compared with a combined share of 35% for transactions using corporate bonds, equities, covered bonds or securitised assets as collateral.


The quality of the collateral is high nonetheless, with AAA and AA- rated securities making up for more than 50% of the total.


There is no mandatory central-clearing of SFTs in the EU.


However, voluntary clearing of certain types of SFTs is possible and takes place to varying degrees.


In repo markets, the incentive of lighter capital requirements for banks has led to a growing share of centrally cleared repos, although estimates vary significantly between data sources.


This is the case in particular for the so-called General Collateral market (GC) which is used for financing purposes.


According to ECB turnover data, the share of centrally cleared repos in the Euro Area is around two thirds, significantly higher than five years ago.


This compares with around 30% of repos outstanding, according to industry survey data.


The volume of secured EUR funding transactions occurring on Eurex Repo's GC Pooling market, the Pan-European marketplace for financing trades in the EUR secured money market, has steadily decreased since 2014.


Contrasting evidence from ICAP shows that trading volumes for centrally cleared repo EUR repo markets have only slightly declined since 2014, suggesting that the decline in GC financing has been offset by a comparable increase in the volume of "specials".


LCH.Clearnet Group reported EUR 147tn and Eurex AG 89tn in repo clearing volumes in 2015.


Repos are typically very short-term instruments. According to ECB data, more than 75% of repo turnover has a one-day maturity or less.


This compares with only 16% for outstanding repo amounts, based on industry survey data.


The decline in GC Pooling volumes was mainly due to a decrease of around 60% in the volume of tomorrow-next and spot-next transactions, while trades volumes for longer maturities remained comparably stable.


In summary, the main trends in repo markets are:

- Predominant use of (high-quality) government bonds as collateral;
- A decline in the volume of GC financing transactions;
- A large but decreasing volume of very short-term transactions;
- A growing share of centrally-cleared repo turnover, at least in the Euro Area;
- A stable share of tri-party repos, usually using highly-rated securities;
- The growing relevance of non-banking repo counterparties, at least in the UK.


Report on securities financing transactions and leverage in the EU Report prepared under the mandate in Article 29(3) SFTR, 4 October 2016, ESMA/2016/1415, p. 43 - 45


Repurchase transactions are subject to reporting requirements as laid down in Article 4(1) of the SFTR and in the secondary legislation.


For the purposes of repurchase transactions' reporting, with respect to counterparties roles ESMA proposes to use the terms "collateral giver" and "collateral taker".


In the case of repo trades, the counterparty that buys securities, commodities, or guaranteed rights relating to title to securities or commodities on the opening or spot leg of the trade and agreeing to sell them at a specified price on a future date (closing or forward leg of the trade) is to be identified as the collateral taker.


The other counterparty shall be identified as the collateral giver.


As ESMA argues, the counterparty would always know whether it provides or receives the collateral.


Moreover, given that in the case of repos, a counterparty is both a buyer and a seller at different points in the transaction ESMA confirmed that the counterparty role (collateral taker and collateral giver) is to be determined based on the opening leg of the repo or buy-sell back as previously specified (Consultation Paper Draft RTS and ITS under SFTR and amendments to related EMIR RTS, 30 September 2016, ESMA/2016/1409, p. 44, 45).


Three repo reporting scenarios depicted in the aforementioned ESMA's Report of 30 September 2016 (p. 45 - 53) are described below.


1. Repo trade without central clearing is the simplest form of a repo trade. It involves two counterparties, for i.e. the lender of the security, commodity, or guaranteed right and the cash giver. The counterparties may choose to use the services of a broker/agent to initiate the trade with the counterparty. The broker/agent does not become a counterparty to the repurchase transaction when the broker/agent only acts on behalf of the counterparty and does not take the position in its own books.


In turn, in a repo trade with central clearing, a CCP interposes between the two counterparties to the trade and becomes a counterparty to a trade. Therefore, the CCP is subject to the SFTR reporting obligation. In the case of establishment of interoperability arrangements between CCPs, transactions between the two CCPs are also reportable.


In the ESMA's assessment the principal clearing model is currently the most common client clearing model in Europe for repos (Consultation Paper of 30 September 2016, p. 49).


2. Another repo reporting scenario occurs when a CCP is interposing itself between the two counterparties that are not clearing members.


This results in the creation of a distinct legal contract between the clearing member and its client (a 'back-to-back contract) in addition to the legal contract between the CCP and the clearing member.


Four new trades result from the clearing of the original trade in the principal model, i.e. between each counterparty and its respective clearing member and mirror transactions between each clearing member and the CCP.


In this case, all five actors (counterparties 1 and 2, clearing members 1 and 2, and the CCP) are subject to the SFTR reporting obligation, resulting in eight reports to the trade repositories (ESMA 's Consultation Paper of 30 September 2016, p. 50).


3. The third scenario of reporting of centrally cleared repos reflects the agency clearing model.


ESMA observes, currently, this model is not used in Europe but may exist in other jurisdictions.


It falls within the scope of SFTR reporting where SFTs are entered into by EU counterparties but cleared in foreign CCPs, where such models may exist.


In this repo reporting scenario a CCP is interposing between the two counterparties that are not clearing members and the clearing members participate in agent capacity, hence two new trades result between each original counterparty and the CCP.


Consequently, there will be four reports in total (two for the trade between the Counterparty 1 and the CCP and two for the trade between the CCP and Counterparty 2).


In this scenario, clearing members act as agents and do not become counterparties subject to the SFTR reporting obligation.


This scenario also covers both following cases: the "sponsored access to CCP" where asset managers (Counterparty 1 or 2) are "sponsored by a clearing member" and the "direct clearing for buy side customers" where there could be another clearer (different from the clearing member) that acts as a clearing agent for the buy side customer (Counterparty 1 or 2);


A broker or a tri-party agent could also be involved in the central clearing scenarios, and, if so, should be reported as above.


ESMA's Report of 30 September 2016 proposes, moreover, to include the market value of the securities as a required element of transaction data for repo and reverse repo trades.


According to the said recommendation the reporting counterparties would update this information on a daily basis.


The market value should be at close of business of each business day as it is used for collateral management purpose, i.e. the market value used to calculate daily variation margin.


Reporting entities should use the "Other modification" action type.










Last Updated on Tuesday, 20 June 2017 21:24


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