European Federation to Launch New Repo-Based Benchmark

Article excerpt

Byline: Natasha de Teran

The European Banking Federation (EBF), the Brussels-based banking organisation, is set to introduce a new repo-based benchmark on which it hopes derivatives contracts will later be launched.

Repurchase agreements, or repos, are used to borrow and lend specific securities, and enable traders to cover their short positions, as well as to finance their bond holdings. In a repo trade the seller lends collateral, in this case bonds, against cash for a predetermined interest rate and period.

EBF was the original sponsor of Euribor (Euro inter-bank borrowing rate), the widely referenced benchmark. The federation's new index, called Eurepo, is designed to be an alternative and an adjunct to Euribor, and should help traders reduce some of the risk inherent in their swaps and money market portfolios.

By being able to swap between the two benchmarks, traders will be better able to manage their funding requirements and reduce their exposure to fluctuations in either the interest rate or repo market.

Eurepo will be based on the rate at which one bank offers funds in euros to another bank in exchange for euro-denominated securities. The paper is used as collateral for a range of quoted maturities stretching from overnight to one year.

The contributors to Eurepo will consist of a panel of 38 pre-selected banks that are already active in the cross-border Euro repo markets.

Godfried de Vidts, repo product manager at Fortis Bank and chairman of the European Repo Council, which is also sponsoring the venture, says: "The first direct benefit will be to all risk managers, providing them with a solid base for the daily evaluations of the positions of the front office. But the aim is that Eurepo will become a credible and established benchmark enabling derivative trading."

There have already been preliminary discussions with Eurex, the joint Swiss-German derivatives exchange, about a possible launch of derivative contracts on the index, according to another senior source involved in the project. …