Repurchase agreements (repos) will be the backbone of the new order after European economic and monetary union (Emu). The implications for the debt repo and securities lending markets in Europe are profound. There will be less impact on the nascent equity repo and securities lending markets, those are driven by the search for higher returns.
John Langton, chief executive of the International Securities Market Association (Isma) is bullish about the future of the debt repo market in Europe. "Cedel and Euroclear reckon that half their combined [annual] turnover of $53 to $54 trillion - that's 12 zeros - is repo business. That's half a trillion dollars or so a week," he says. "It's going to be one of the major arms of operating monetary policy in the EU, so it just has to grow and grow."
An established international repo market already exists in London, and it will grow with monetary union. "Over the last six months, repo activity has been focused in German domestic bonds and several liquid domestic bonds in Italy," says Greg Harmon, senior vice-president at State Street Bank & Trust. "The euro will blur some of the lines as participants will be able to deal with each other where before there were fairly clear-cut domestic markets, and the international repo market will become much more liquid."