Segmentation In $9T Europe's Repo Market Could Lead To Problems: BSI Report

The $9 trillion European repo market is showing signs of segmentation, which could eventually “impede the redistribution of liquidity,” according to Bloomberg.

What Happened

The European repo market is showing signs of fragmentations, an analysis of the Bank for International Settlements (BIS) report shows.

“We find that the market recovered strongly from periods of intense stress, even though it remains segmented according to the home country of the collateral used,” according to the BIS report.

Why It Matters

The repo market in Europe has recently seen more people interested in trading collateral rather than funding. This, according to Bloomberg, could cause cash flow problems in the market in the near future.

“In recent years, signs of segmentation have increased as the main motivation of repo market participants has shifted from funding to the trading of collateral,” said the BIS report.

“This may impede the redistribution of liquidity,” authors Patrick Schaffner, Angelo Ranaldo and Kostas Tsatsaronis wrote.

The repo market typically has two main segments - general collateral (GC) repos and specific collateral (SC) repos. While the former focuses on borrowing and lending of cash, the latter is more suitable for trades driven by collateral requirements.

Since the segmentation of market activity into different trading platforms is one of the main drivers of the repo market, it could “hinder arbitrage activity across collateral segments,” the report mentioned.  

 “It remains unclear whether the importance of collateral demand in reshaping the repo market’s dynamics is a permanent shift or only a consequence of the central bank’s balance sheet expansion,” according to the BIS report. “In either case, these efforts have amplified the trend towards market segmentation.”