Back in September 2010, the European Repo Council’s survey of the European repo market noted a striking anomaly.
The European repo market — worth approximately €6,979bn — had seen a near doubling in the amount of repo being used for dollar funding.
What’s more, the boom seemed sudden and mostly unexplained, with dollar funding surging very suddenly to 28.3 per cent of the market in June 2010 versus 15.9 per cent in December 2009:
A quick back of an envelope calculation puts that dollar exposure at something like €1,975bn, though it’s worth pointing out that at least 3.1 per cent of that sum would have been drawn against US-denominated collateral.
Nevertheless, if you’re still thinking that’s some hefty currency basis risk to manage, then you’ve read our minds.
Not too much later USDEUR swap rates started getting pretty volatile — hitting somewhere in the region of -35.7 basis points versus what had been a constant -20 basis points since the crisis.
Come the latest June survey (released this September) and the European Repo Council found that the trend towards dollar funding had been unwound just as quickly as it had been put on.
From their survey:
The share of the US dollar continued to retreat, reaching 16.2% from 20.1% in December 2010, possibly representing the unwinding of the remainder of the exceptional transactions recorded in June 2010. There was a jump in the share of the Japanese yen to a record 6.4% from 3.6%. In electronic trading, there was a sharp increase in the share of the euro, at the expense of the Swiss franc and pound sterling.
So what changed?
The only thing that comes to mind is that in the interim much of the euro collateral pledged may have started to lose its value, a fact which would either have resulted in significant margin calls for additional collateral or the return of the US dollar funding outright.
We know from the statistics what happened next. By June 2011, most of the exceptional dollar trades had been unwound. In which case, did banks move elsewhere to satisfy their dollar funding needs? Perhaps the currency swap markets direct?
Or did some struggle to find workable alternatives at all?
Whatever the case, the June 2010 dollar repo boom potentially gives us an indication of the size of the US dollar funding deficit in Europe — a number that’s far too close to $1,000bn for comfort.
Related links:
All hail, dollar repo in Europe – FT Alphaville
European repo is back from the dead, says ICMA - FT Alphaville
Euribor has been vaporised – FT Alphaville