LONDON (Reuters) - ICAP’s IAP.L BrokerTec fixed income trading platform and the London Stock Exchange’s (LSE.L) bond trading unit MTS will launch a series of euro zone repo market indices in the fourth quarter, the companies said on Monday.
The indices could be an alternative to the euro zone’s Eurepo index, compiled by the European Banking Federation, which also sets the Euribor rates that aim to track unsecured lending among the bloc’s banks, analysts said.
Financial institutions use the repo market to borrow cash by posting collateral, such as government bonds.
Although the market has shrunk sharply this year after the European Central Bank injected around 1 trillion euros ($1.2 trillion) into the banking system, it remains an important funding venue for many euro zone banks shut out of unsecured markets.
The BrokerTec/MTS indices will be based on one-day repo transactions using government bonds issued by Germany, France, Italy, Spain, Austria, the Netherlands, Belgium and Finland.
They will indicate volume-weighted funding rates using those bonds as collateral.
By contrast, the European Banking Federation’s Eurepo index, which was first published in March 2002, is based on contributions from a panel of banks and will take into account only “the best collateral within the most actively traded European repo market.”
The BrokerTec/MTS indices were designed in response to “significant market demand”, the two companies said in a statement, and are supported by large players such as Credit Suisse or JPMorgan.
The euro zone debt crisis has hit Italian and Spanish bonds and their value as collateral, sending national repo rates within the bloc on diverging paths. Having an index based on repo rates in each country allows investors to create financial products benchmarked to that index.
“With the divergence of euro zone markets and macro-economic issues affecting the European government bond market, developing an index that provides a cost of funding reference for sovereign bonds has considerable interest and demand from various sectors of the markets,” BrokerTec’s John Edwards said in a statement.
The statement quoted Stefano Bellani, head of repo financing in EMEA at J.P. Morgan, as saying the ICAP/MTS index “will be backed by traded volume, executed on electronic trading platforms and cleared via central counterparties rather than based on indicative quotes and this could potentially become a benchmark for secured funding rates across Europe.”
Analysts warn that the planned BrokerTec/MTS indices may have shortcomings as well. In Spain, for instance, a large chunk of the repo activity goes through clearing houses, such as LCH.Clearnet.
“(The indexes) would help to gauge the interest in various repo markets in the euro zone ... but it would only be an index for what they see on their own platforms so it may not be super-relevant,” one European interest rates strategist said.
LSE plans to acquire LCH.Clearnet by the end of the year.
BrokerTec and MTS are electronic platforms accounting for over 250 billion euros of daily repo transactions using euro zone sovereign bonds.
Discussions were progressing with a third potential partner “who has an established presence in the repo sector to further increase the robustness of the index”, their statement said. ($1 = 0.8132 euros)
Reporting by Marius Zaharia; Editing by Ruth Pitchford