European repo is on the decline According to the latest bi-annual European repo survey by ICMA, released on Wednesday, the market for repo in Europe shrunk to €5.5tn in December 2013 from €6tn in June 2013 - a sharp decline by any means. As the ICMA press release notes: The latest figure for repo market size is still substantially above the lowest survey figure of EUR 4,633 billion recorded in December 2008, although well short of the pre-crisis peak in European repo market size of EUR 6,775 billion in June 2007. The author of the survey, Richard Comotto of the ICMA Centre, University of Reading, indicated that several factors may have been at work: "The contraction of the market would seem to be the result of the usual shrinkage of repo books at year-end plus the impact of the liquidity offered by the ECB in December in order to relieve any seasonal funding shortages. It may also have been driven by the anticipation of future regulatory constraints on short-term wholesale funding. Godfried De Vidts, Chairman of ICMA's European Repo Council, outlined the challenges facing the European market: "The repo market still faces an unclear landscape. The impact of regulatory reforms and interactions with the central bank community continue to increase uncertainty. Market users need to be alert to changing market forces, including the increased use of collateral while the introduction of mandatory clearing for OTC derivatives is taking place. Comotto also noted that there were some interesting structural changes in the market with respect to participants, tri-party repo share and the use of French collateral: The reduced need for market funding would normally have been expected to hit the share of tri- party repo, as this is a pure cash-driven product. However, the share of tri-party repo actually increased, if only modestly. And there was a dramatic expansion of the tri-party market outside the survey, which would seem to confirm anecdotal evidence of new entrants arriving into that market. It may also be the result of increased use by existing participants, among whom, may be US money market mutual funds. These investors increased their lending to core Eurozone banks, not least, to French banks.It is noteworthy that the share of French collateral in tri-party repo jumped. And with regards to French collateral specifically: In directly-reported tri-party business, the biggest changes were increases in French collateral (to 17.2% from 14.2%) and UK government securities (to 1.9% from 1.0%), and falls in German non-government securities to 11.7% from 15.6% and issues by international financial institutions to 9.0% from 9.7%. The increase in the use of French collateral in tri- party repo may reflect increased lending by US money market mutual funds to French banks. What's worth noting, however, is that this survey was conducted on December 11. More recent US money market data seems to suggest things may have reversed quite abruptly on the French bank funding front by the end of the year. As a report from Citi's Short-end notes team observed earlier this month: Almost all of the decrease in MMF funding of foreign institutions was accounted for by a decrease in MMF investments in European issuers.Cash placed with French issuers fell by $50 billion, with German issuers by $40 billion and with UK issuers by $26 billion. As a percentage of assets, holdings of European issued assets fell dramatically to 15% of total assets. Figure 2 With less investable assets issued by foreign banks and the same amount of cash to invest, MMF in our sample placed just under $122 billion in cash with the Fed full allotment fixed-rate overnight reverse repo facility over year-end. Of the 66 MMF in our sample with positive balances at the Fed on Dec. 31, 52 placed over $1 billion in cash with the Fed and 19 hit their size limit of $3 billion per counterparty. The reverse repo facility allows cash to move directly from money funds to the Fed, rather than from MMFs to foreign banks which then hold reserves at the Fed. This underscores the sense in which the reverse-repo facility acts similarly to an interest on reserves for a broader set of counterparties. Interesting dynamics to be aware of in any case.