By James Upton, Commercial Director, EquityClear and RepoClear, LCH.
The cleared European repo market today consists almost entirely of bank-to-bank trades, and LCH processes a significant proportion of that interbank repo market, at just under €100 trillion in H1 2018.
That cleared market has been growing. Why the increase in repo clearing? For banks, netting is the driver. To be eligible for balance sheet netting, transactions must face the same counterparty, settle at the same location and in the same currency, and have the same settlement date.
Opportunities to increase netting are driving two changes in the market today.
First, TARGET2-Securities (T2S), a pan-European platform for securities settlement in central bank funds, offers banks the potential to benefit from increased balance sheet netting. Throughout 2018 and in early 2019, we are extending our RepoClear SA service in Paris to support all € debts cleared today across both our CCPs, allowing member banks the opportunity for improved netting once all their transactions face the same counterparty.
Second, the push for netting is increasingly attracting a greater number and range of participants to repo clearing. At LCH, we have launched our Sponsored Clearing model for the buy-side, allowing safe access to cleared repo. This is live at RepoClear Ltd., and is soon to launch in RepoClear SA. The netting that this affords to banks creates increased and stable balance sheet capacity, which those banks can then offer their valued customers.
The benefits of this balance sheet netting for both banks and their customers are significant.
Repo clearing also has other benefits for the buy-side, notably significant operational and settlement efficiencies compared to trading in the un-cleared market. At a time when the repo market is undergoing significant regulatory change — such as the introduction of transaction reporting under the Securities Financing Transactions Regulation (SFTR) — these operational efficiencies are welcome.
So, times are changing in the world of repo clearing. What’s the exciting result of all this change? LCH members will soon have access to a single CCP for all their Euro-debt clearing needs. This provides a deeper pool of liquidity and increases the benefits for all members, both banks and their customers, making their lives easier and more profitable.