Vitor Constâncio, vice-president of the European Central Bank, has proposed the creation of a central database to provide information on the European repo market.
“Establishing a set of timely data concerning the repo market would be of key importance for supervisors, central banks and market participants,” said Constâncio.
Repo is largely an over-the-counter (OTC) market where rates and volumes are difficult to observe in real time. This means that, at present, there is no comprehensive source of information in Europe.
Speaking at the EC’s shadow banking conference on April 27, Constâncio said that the US model could provide a starting point for a European blueprint.
In the US, primary dealers voluntarily report on their trading activities on a weekly basis. They also report on their cash and financing positions.
This takes place across a wide variety of underlying securities differentiating according to the counterparty type.
As in the US, a central database would be a joint effort by public authorities and the financial industry.
Estimates valued the US repo market at around $12 trillion in early 2010.
Although there are no official figures, the latest December ICMA survey, valued the total outstanding repos in the EU in December 2011 at €6.2 trillion.
According to Constâncio, the ECB’s role in macro-prudential financial stability and the closeness of repo to monetary policy, mean the ECB would be well placed to centralise the data gathering for the euro repo market.
But Constâncio also called for the EC’s support in implementing the proposal.
As a first step, the ECB vice-president suggested that his organisation work with the EC to prepare a detailed feasibility study for the repo market database.
Trade repositories have enhanced transparency in other market segments, such as the OTC derivatives, alongside the introduction of mandatory clearing.
But repo transactions are largely already channelled to formal clearing and settlement infrastructures. Central Securities Depositories (CSDs) already centralise data on repo that can be derived from the settlement instructions.
“It could be argued that they de facto perform already a function that is similar to that of a trade repository,” said Constâncio.
CCPs, triparty agents and custodian banks for the bilateral segment also perform a similar function for repos of their customers.
“A central database fed by infrastructures and custodian banks to the extent that they internalise repo settlement in their own books, would be the place for the much-needed central view on repo market and its participants, both banks and non-banks,” added the ECB spokesman.
But the technical details of this solution would have to be investigated.
Infrastructures would have to report data based on a common format. Such a format would have to be defined taking into account their respective special focus.
CCPs, for example, would have to report pre-netting repo data, whereas CSDs would have to retrieve and report data on the ordering party, often a customer of the CSD participant.
A coordinated approach
Given that one of the main risks stemming from shadow banking is regulatory arbitrage, Constâncio also said that it is crucial to ensure consistency of policy initiatives across countries.
In the US the Dodd-Frank Act prohibits banks from proprietary trading (the so-called Volcker rule) and restricts investments in hedge funds and private equity by commercial banks and their affiliates.
Similar restrictions are not being considered by the FSB, which is looking instead at enhancing the prudential requirements related to the interplay between banks and hedge funds.
“This could create the potential for an asymmetry leading to distorted regulatory incentives,” said Constâncio.
Paul Tucker’s ten commandments of shadow banking are also now available to read on IFLR.