The European Repo Council’s latest survey on changing collateral trends in the bilateral repo market:
There seems to have been a modest shift out of core Eurozone collateral.
The share of German collateral was very slightly lower, at 20.7% compared with 20.9% while in December 2011 but German government bond collateral fell much more sharply, to 14.2% from 15.4%, while French collateral declined to 8.6% from 9.8% and Belgian to 3.8% from 4.1%. The smaller share of German government bond collateral reflected continued scarcity due to hoarding by investors seeking safe haven assets. Other German fixed-income, excluding pfandbrief, expanded to 5.5% from 4.4%, possibly reflecting greater resort to non-government public sector bonds to compensate for the scarcity of high-quality government debt.
As for collateral used in tri-party agreements:
In contrast, the share of French government bonds in tri-party collateral expanded to 7.1% from 4.8% and German government bonds to 10.8% from 8.4%. There was also a substantial increase in the use of collateral issued by official international financial institutions (to 6.5% from 3.9%). However, the most dramatic increase was in pfandbrief, which jumped to a record 17.4% from 11.4%.
The growing use of German government bonds as collateral in tri-party contrasts with the situation in the wider market, where parties seem reluctant to repo out these bonds in case they are not returned. The difference may be that buyers in most tri-party repo systems are not able to re-use collateral outside the system, so the seller can be confident of receiving his bonds back at the maturity of a tri-party repo.
The collateral composition of tri-party repo has proved a sensitive indicator of risk tolerance since the start of the crisis, so the latest shifts suggest heightened risk aversion. In tri-party repo, the use of equity collateral partly recovered, reaching 14.7% from 12.8%.
But the use of equity by most survey participants remains negligible. It has been suggested that this reflects, not just issues such as ensuring the survey reaches the desks trading equity and the greater use of synthetic structures for equity repos, but also a preference for documenting equity repo as securities loans.
In other words, if you’re lucky enough to own German or core European debt — whether government or covered bonds, especially Pfandbrief — it’s unlikely that you currently feel comfortable using them for financing purposes in traditional repo markets because there’s a growing risk that the bonds might not come back at all.
Hence the increased use of tri-party repo agreements, which ensure collateral doesn’t go AWOL outside of respective collateral systems in the same way.
Nevertheless, when it comes to traditional markets, the important point that the above implies is that “fails to deliver” must by now be becoming quite an issue.
Key repo contracts market falls 14% – FT