BrokerTec, a global electronic fixed income trading platform owned by interdealer broker ICAP, and MTS, a fixed income trading venue in Europe, which is majority owned by London Stock Exchange Group, have announced plans to launch a daily repo index series for the euro.
The index series will include indices for each of the sovereign bond markets of Germany, France, Italy, Spain, Austria, Netherlands, Belgium and Finland and is due to be launched in Q4 2012.
The index calculation and design has been established following market interest and demand, and is supported by a group of Repo dealers representing several major financial institutions. BrokerTec and MTS intend to establish an advisory group to ensure that the indices remain relevant to users.
It is understood that discussions are progressing with a third potential partner who has an established presence in the repo sector to further increase the robustness of the index.
Repo transactions are used for borrowing and lending on a secured basis and for financing and covering bond positions. Overall daily transaction volumes in eurozone sovereign repos typically reach in excess of €300 billion (single count).
The indices will be calculated with one-day repo transactions, which represent the bulk of trading activity. By using aggregated data from real repo transactions over each trading day, the index will calculate the volume-weighted effective funding rate for eurozone sovereign bonds issued in these countries.
The indices could offer an alternative to the eurozone’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, according to a Reuters report.
Commenting on the new index series, Romain Dumas, Managing Director of EMEA short-term government products at Credit Suisse, said: “We welcome this development. In early discussions we have been encouraged by the enthusiastic support shown from the Repo community, in helping to develop this index as well as by the interest emanating from the derivatives desks. We are optimistic of its potential in accurately reflecting the secured cost of funding in each of the main eurozone markets.”
Stefano Bellani, Head of Repo Financing in EMEA at JP Morgan, said: “This new 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.”
Oliver Clark of MTS said: “This new Index series is being launched at a time when the focus on transparency in repos and the importance of secured investment and funding are stronger than ever. The unparalleled transparency of these new daily fixings will provide confidence to both repo participants and investors in both benchmarking and in the issuance and management of financial products referenced to the index series.”
Meanwhile John Edwards of BrokerTec said: ”With the divergence of Eurozone 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.”
Whilst exchange-traded funds (ETFs) tracking these indices are a long way off the radar, investors looking for a similar cash-referenced product are able to invest in a number of ETFs tracking related overnight lending rates.
Of note is the DB X-trackers EONIA Total Return Index ETF (XEON) offered by Deutsche Bank’s DB X-trackers platform. This ETF is intended to reflect the performance of a daily rolled deposit earning EONIA (the Euro Over Night Index Average), an effective overnight rate computed as a weighted average of all overnight unsecured lending transactions in the interbank market compiled by the European Central Bank and the European Banking Federation. XEON has some £1.2 billion in assets.
Deutsche Bank also offers ETF products referenced to non-eurozone-based rates including SONIA (Sterling Overnight Index Average), via the DB X-trackers Sterling Cash ETF (XSTR), as well as the FED Funds Effective Rate, the Australia Overnight Money Market Index and the Singapore SORA Index.
Investors looking for Swedish krona (SEK) exposure could consider the XACT Sweden Repo ETF (XACTREPO) from Xact. This fund tracks the Handelsbanken Sweden Repo Tradable index, which replicates the performance of the Swedish Riksbank’s repo rate.