Europe is a leading world centre for financial markets alongside North America and the
Far East. European securities exchanges play a vital role in these markets by providing
companies with the opportunity to raise capital and by giving both private and institutional
investors the opportunity to invest.
There have been three major developments that characterise the changes in the European
Exchange landscape over the past twenty years: the globalisation of financial markets, the
revolutionary developments of technology, and European regulation. A growing number of
companies and banks wish to raise capital in more than one country. Investors too are
looking at integrated or interconnected international markets in order to maximise their
return and spread their capital risk. Long term developments such as the introduction of the
euro, the spread of privatisation, the growing number of pan-European mergers and the rise
of the retail investor have encouraged closer cooperation and, in some cases, the
integration of Europe’s formerly diverse and separate equity markets. At the same time,
over the past decade, every European exchange membership has undergone a major
transformation. Most have opened up to foreign-owned intermediaries. Trading is executed
electronically, often from overseas.
European securities exchanges have risen to these challenges in a number of ways. Several
exchanges increased the number of hours during which trading can take place to enhance
access. They also introduced market-making and block-trading to increase liquidity.
Additionally, order handling and execution systems were refined in order to boost
efficiency and to reduce settlement times. Most exchanges also improved information
systems to increase transparency and access. By developing new and imaginative
investment instruments investment options have been enhanced. Thus, the European
exchanges of today rightly present themselves as modern, high-tech enterprises. In several
European countries, whole securities market services groups have grown around the
traditional exchanges. With very few exceptions, the national derivatives markets are
generally found today under the same roof as the national cash markets. Some of these
groups even integrated their national clearing and settlement institutions, their IT provider,
information distribution services and others. [...]
Table of Contents
1 INTRODUCTION
2 THE NOTION OF “REPURCHASE AGREEMENTS”
2.1 DEFINITION AND CHARACTERISTICS OF THE “REPURCHASE AGREEMENT”
2.2 COLLATERAL
2.2.1 T-Bonds and T-Notes
2.2.2 T-Bills
2.2.3 Pfandbriefe
2.3 THE PRICING OF REPOS
2.4 THE RISK ASSOCIATED WITH REPOS
2.5 THE ADVANTAGES OF REPOS
2.6 DIFFERENTIATION TO OTHER INSTRUMENTS
2.6.1 Securities Lending and Borrowing
2.6.2 Sell/Buy Back Agreements
2.6.3 Lombard Loan
2.6.4 Interest rate swap
3 THE EUREX MARKET MODEL
3.1 THE ROLE OF FINANCIAL MARKETS AND FINANCIAL INTERMEDIATION
3.1.1 OTC Trade versus Exchanges
3.1.2 The Derivatives Exchange
3.2 THE HISTORICAL DEVELOPMENT OF THE EUREX
3.3 THE CURRENT MARKET MICROSTRUCTURE
3.3.1 Structural Features
3.3.2 Products
3.3.3 Settlement and Clearing
3.3.3.1 Eurex Clearing AG
3.3.3.2 SIC Swiss Interbank Clearing
3.3.3.3 SIS SegaInterSettle AG
3.3.4 The Eurex Fee and Pricing Model
3.3.5 The Development of the Trading Volume
3.4 INTERNATIONAL COMPETITION
3.4.1 Europe: Euronext, Newex, Norex
3.4.2 United States: CBoT & CME
3.4.3 The Global Trend
4 THE EUREX REPO MARKET MODEL
4.1 THE CURRENT MARKET MICRO STRUCTURE
4.1.1 General Conditions for Participation in Eurex Repo
4.1.2 Requirements for the Use of the Eurex Repo Trading Platform
4.1.3 Rights and Obligations of Participants on Eurex Repo
4.1.4 Trading Hours and Trading Calendar
4.1.5 Trading Procedures
4.1.6 Fees and the Repo Rate
4.1.7 Collateral
4.1.8 Settlement and Clearing
4.2 LEGAL FOUNDATIONS FOR THE EUREX REPO SYSTEM
4.3 MARKET SURVEILLANCE
4.4 EUREX REPO MARKET PRACTICES
4.5 CRITICAL FACTORS FOR THE EUREX REPO MARKET MODEL
4.6 FUTURE OUTLOOK FOR THE EUREX REPO MARKET MODEL
5 CONCLUSION
Research Objectives and Themes
This thesis aims to analyze and critically assess the Eurex Repo market model, exploring its efficiency as a trading platform for derivatives with a specific focus on repurchase agreements. The research investigates how this model navigates the competitive landscape of international financial markets and examines the factors driving its growth and future integration.
- Mechanisms and characteristics of repurchase agreements.
- Role of financial intermediation and the historical development of Eurex.
- Examination of the Eurex Repo trading platform, including structure, participants, and settlement processes.
- Comparative analysis of Eurex against international competitors such as Euronext, CBoT, and CME.
- Critical evaluation of key success factors, legal foundations, and future outlook of the Eurex Repo market model.
Excerpt from the Book
2.1 Definition and Characteristics of the “Repurchase Agreement”
Repurchase agreements play a crucial role in the efficient allocation of capital in financial markets. „With a repurchase agreement (repo, RP), one party sells securities to another for cash with an agreement to repurchase the securities at a specified date and price. In essence, the repo transaction represents a loan backed by the securities” (Madura, 2003, p.142).
The lender has claim to the securities, in the case that the borrower defaults on the loan. Most repos are overnight transactions, with the sale taking place one day and being reversed the next day. Long-term repos can extend for a month or even up to one year. A reverse repo refers to the purchase of securities by one party from another with an agreement to sell them. The term is used to describe the opposite side of a repo transaction. Thus, a repo and a reverse repo can refer to the same transaction but from different perspectives (see Wechsler, 1998, p. 9).
While a repo is legally the sale and subsequent repurchase of a security, its economic effect is that of a secured loan. Economically, the party purchasing the security makes funds available to the seller and holds the security as collateral. If the security pays a dividend, coupon or partial redemptions during the repo, this is returned to the original owner. The difference between the sale and repurchase prices paid for the security represents interest on the loan. Indeed, repos are quoted as interest rates (see Hull, 1997, p. 50). The dealer thus takes out a one-day loan from the investor and the securities serve as collateral. Repos are considered very safe in terms of credit risk because, in general, the loans are backed by government securities.
Summary of Chapters
1 INTRODUCTION: This chapter outlines the development of the European exchange landscape and sets the goal of analyzing the Eurex Repo market model.
2 THE NOTION OF “REPURCHASE AGREEMENTS”: It defines repurchase agreements, discusses collateral types, pricing mechanisms, associated risks, and differentiates repos from similar financial instruments.
3 THE EUREX MARKET MODEL: This section provides an overview of financial markets, the history of Eurex, its current market microstructure, and the international competitive environment.
4 THE EUREX REPO MARKET MODEL: The main body of the work, focusing on the microstructure, participation requirements, trading procedures, fees, and critical success factors of the Eurex Repo system.
5 CONCLUSION: The author summarizes the findings, concluding that the Eurex Repo model is well-positioned for future success due to its integrated value chain and specialization.
Keywords
Eurex Repo, Repurchase Agreements, Financial Intermediation, Derivatives Exchange, Market Microstructure, Collateral, Risk Management, Settlement and Clearing, Financial Markets, Liquidity Management, Eurex Clearing AG, Euronext, CBoT, CME, Securities Lending.
Frequently Asked Questions
What is the core focus of this thesis?
The thesis focuses on analyzing and evaluating the Eurex Repo market model, assessing its efficiency and success as a trading platform for repurchase agreements within the derivatives market.
What are the primary themes discussed in the work?
The core themes include the definition and risk profile of repurchase agreements, the role of financial intermediation, the Eurex market's historical development, its technical and clearing infrastructure, and its international competitiveness.
What is the primary research goal?
The primary goal is to investigate the key drivers behind the Eurex Repo model's success and to explore future perspectives for this market, especially considering its expansion into the U.S. and competition from other major exchanges.
Which methodology is applied in the research?
The research is based on a comprehensive analysis of financial market mechanisms, an evaluation of the Eurex value chain, and a comparative study of the Eurex Repo model against other global exchanges like Euronext and those in the U.S.
What topics are covered in the main section of the document?
The main section (Chapter 4) covers the current market structure of Eurex Repo, the conditions for participation, rights and obligations of traders, trading procedures, fees, the role of collateral, and the future outlook of the platform.
Which keywords characterize the work?
The most relevant terms include Eurex Repo, Repurchase Agreements, Clearing, Settlement, Collateral, Derivatives Exchange, and Financial Intermediation.
How does Eurex manage risk in the repo market?
Eurex manages risk primarily through its integrated clearing house, Eurex Clearing AG, which acts as a central counterparty, utilizing risk-based margining and collateral requirements.
What is the significance of the "overnight" repo transaction in the Eurex model?
The overnight repo transaction is a key competitive advantage, as Eurex is one of the few electronic markets that offers this liquidity management tool, which is highly sought after by commercial banks and central banks.
- Quote paper
- Monika Gruber (Author), 2004, Analysis and Evaluation of the Eurex Repo Market Model, Munich, GRIN Verlag, https://www.hausarbeiten.de/document/32816
