Repo in Europe

In recent years, the trading of sale and repurchase agreements - or repo as they are commonly known today - has spread dramatically from its Anglo-Saxon heartland. The market is now also common throughout Europe, where the market utilizes these instruments for a variety of purposes. In today's world, repo are the single most important means employed by central banks to carry out open market operations in order to steer liquidity within the financial system, and hence implement their monetary policies. For commercial banks, the move away from unsecured money market transactions in favor of borrowings backed by highly rated securities means a significant reduction in credit risk and the tasks associated with assessing creditworthiness. For securities dealers, Special Repo is an attractive refinancing instrument and facilitates firms' overall collateral management efforts. Within the scope of a centralized approach to funding that includes money market transactions, forex swaps and securities lending, repo is already today an indispensable tool and constitutes an enormous amount of potential volume.

1. Bank A wants to borrow cash from Bank B for a period from overnight to about one year
2. This loan is backed with securities. Bank A lends a security to Bank B for the period
3. At maturity, Bank A pays back the cash amount and the interest based on the repo interest rate. Bank B sends the security back to Bank A
4. The security is in most cases a government bond. Equity of selected highly capitalized blue chips and corporate bonds may be exchanged too, but government bond repo represent the majority of the market volume

The motivation to trade a repo is either to borrow cash and lend a security out of a basket (GC Repo) or to borrow a specific security against cash (Special Repo). The following table illustrates the difference:

Given the above arguments, the market will grow in the GC Repo market, but only with fully integrated value chain.