August 10, 2010 7:19 pm

Spanish banks go abroad to revive repo financing

Spanish banks and savings banks, shaken by the recent freeze they faced in the government bond repo market, are increasingly seeking membership of international trading networks and clearing houses to widen their options for raising short-term liquidity.

Several large banks, including Caja Madrid and BBVA, are applying to be members of LCH.Clearnet, the London based bond and repos clearer that launched operations for Spanish government bonds and repos on Monday in response to rising demand, according to people familiar with the applications.

Santander, the biggest bank in the eurozone by market capitalisation, has long been a member of LCH.Clearnet through its UK subsidiary Cater Allen, the private bank.

Caja Madrid, a large unlisted savings bank, in July became the first Spanish institution to join Eurex Repo, an electronic market attached to Eurex Clearing, which is controlled by Deutsche Börse. Other major Spanish lenders are expected to follow suit.

Repo transactions – which allow financial institutions to offer or obtain short-term liquidity using government bond holdings as security – were for Spanish banks mostly carried out within Spain before the financial crisis erupted in 2008.

In recent months even these repo deals became almost impossible as Spanish lenders found themselves starved of wholesale liquidity amid predictions of a Spanish sovereign debt crisis following the bailout of Greece.

“The problem really was that the Spanish repo market was isolated from the cross-border market. It was a protected market,” said Richard Comotto, a secured finance expert who is senior visiting fellow at the ICMA Centre of Reading University. ICMA is the International Capital Markets Association.

“Spanish banks are now flooding to join LCH and Eurex because in Europe now people really only want to deal with you through a CCP [central counterparty clearing system].”

Both lenders and borrowers can benefit from the anonymity and settlement guarantee provided by a clearing house. Clearing houses reduce counterparty risk by standing between buyers and sellers in a transaction, stepping in in case of a default by either party.

Spain’s absence from international clearing systems has been an anomaly given the size of the Spanish debt market and the fact that LCH.Clearnet has already been dealing with 10 other European government bond markets.

Spanish bankers and analysts said that Spain was late to join the trend towards electronic trading using CCPs because the country’s settlement system was isolated from those used by its European neighbours.

But banks said that they were already seeing benefits from their new involvement in the international clearing houses, helped by a general easing of the previously frozen wholesale finance markets. The repo deals are usually used to raise money for between a week and three months.

Jaime Comunión, treasury head at Caja Madrid, said of the bank’s new Eurex membership that Caja Madrid had hoped to raise €3bn in a month but had managed €5bn. “We are finding new ways of wholesale financing outside Spain,” he said. “We are normalising the situation of the repo industry in Europe.”

Mr Comunión, who says Caja Madrid’s Eurex membership will allow it act as an intermediary for other Spanish institutions, said prices were already improving for Spanish banks seeking liquidity, with the interest rate on two-week repos falling sharply in the past few weeks and expected to fall further.

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