Major Markets
This section gives a brief synopsis of each major repo market. The principles behind the trade are the same in any market. However, each market has its own unique characteristics and these are summarised below.
Government bonds versus Corporate Bonds
In terms of both volume and importance, the repo market in government bonds far outweighs that in other securities. There are various reasons for this. The average size of a government bond issue is typically many times larger than that of a corporate bond or eurobond. As a result, match book traders are much more willing to make a tight two-way dealing price in government issues. Liquidity in government bonds is also enhanced by the fact that the specials market is much more active; government bonds are much more likely to be used for hedging or in derivatives trading. In the wake of European monetary union and a single euro yield curve, there is an increased focus on the growth potential of non-government repo markets. Over time, a larger and more liquid repo market in credit products is likely to evolve.
USA The original repo market and the largest and most liquid. The efficiency of the Federal wire as a settlement mechanism enables a same-day domestic settlement market to exist. Government bills, notes and bonds are the most actively traded instruments. There is also a market in federal agency debentures and mortgage-backed securities (MBS).
Canada Similar to the US market (same-day settlement is the norm) but smaller and less liquid.
Japan The Japanese repo market was launched in April 1996 to provide investors with a market for investing surplus cash and to provide bond dealers such as securities firms with a market for financing their portfolios. The market reached an outstanding balance of about 45 trillion yen, accounting for about 22% of the money market total. The introduction of the real-time gross settlement (RTGS) system in 2001 was a major step forward, making settlement of Japanese Government Bonds quicker and more efficient.
Core Europe
The European markets below are now part of the single Euro currency, but we discuss them separately because although they share a currency, each still has its own idiosyncrasies.
France France and Germany are by far the most efficient markets in Europe. The French domestic market is more liquid and more significant than the international cross-border market based primarily in London. The French market has its own unique characteristics. For example, a significant proportion of business is done on a floating rate basis.
Germany Germany's benchmark status in European government bond markets, coupled with an active derivatives market, have made the bund repo market one of the most important in Europe. The market evolved primarily offshore in London due to a combination of factors, chief among which was the Bundesbank's minimum reserve requirement for German banks, which effectively priced them out of the market. After years of pressure, the minimum reserve requirement for repo trades was finally scrapped at the end of 1996. This has helped the evolution of the German domestic market. However, as yet, no significant international business has migrated to Frankfurt from London. Because of the high liquidity of the German market, settlement through Euroclear is easily carried out.
Italy The Italian Government bond market is one of the largest in the world, and the Italian repo market reflects that. A special feature of the Italian market is that historically government bonds (BTPs, CTOs and CCTs) withheld tax on coupons at source, at a rate of 12.5%. Foreign institutions entitled to reclaim this tax had to do so via a domestic custodian. Nowadays, this is only applicable to foreign institutions which are incorporated in countries that do not have a tax treaty with the Italian government. In the case of UBS, settlement happens in both the domestic market and via Euroclear. Government bond repo markets are also actively traded in the following Euro countries: Spain, Netherlands, Belgium, Austria, Finland and the Irish Republic. In all cases, there is a local domestic market interacting with the international cross-border market based in London.
UK The UK Gilt repo market was introduced in 1996 and now represents about £110 billion worth of repos and stock lending. The Bank of England deals with a wide range of financial institutions active in the gilt repo. Each of these institutions must satisfy a number of financial criteria to ensure that operations function efficiently and that the liquidity supplied is available to all market participants. The provision of secure settlement for gilt-edged securities is through CREST, an efficient and reliable system of electronic book entry transfers in real time against an assured payment.
Scandinavian Countries The Norwegian repo market is not very liquid and has a domestic settlement system. The Swedish repo market also settles domestically while the Danish one settles mainly via Euroclear. Both the Swedish and Danish markets are very liquid.
