Analysis and Evaluation of the Eurex Repo Market Model

Diploma Thesis from the year 2004 in the subject Business economics - Investment and Finance, grade: 1,3, University of Innsbruck (Sozial- und Wirtschaftswissenschaftliche Fakultät), language: English, abstract: Inhaltsangabe:Abstract:The first cross-border merger of exchanges in Europe, in 1999, happened even across the borders of the EU when the national derivatives markets of Germany and Switzerland created Eurex. In 2000, Euronext, the second big merger project, became reality. The Exchanges of Amsterdam, Paris and Brussels created a new joint platform with corporate structure. Norex, Virt-X, Newex are further merger projects. During the last decade, not only the institutional framework of exchanges has changed, but also the popularity of different products that are traded on the new platforms. Currently the derivatives market, in particular the trading with repurchase agreements, experiences major growth in Europe as well as in the U.S. The Eurex Repo platform observes a steady increase of outstanding volume, due to the fact that Eurex Repo is the only electronic market that offers repo transactions with the shortest possible term of just one night (overnight repo transaction).The goal of this paper is to analyse and to critically assess the Eurex Repo market model mentioned above, which is currently treated as the most efficient and successful trading platform for derivatives, with a specific focus on repurchase agreements.Chapter 2 aims to give answers to the following questions: What is a repurchase agreement? Which are the characteristics of repo markets in general? Which risks are associated with repos and how does the pricing of repos work? Which other instruments for liquidity management do exist for banks?The purpose of Chapter 3 is to give an overview of the derivatives market in general, past business methods, the intermediating role of banks and exchanges, and the dynamic development of the derivatives market. In addition, the Eurex market model will be described, as well as competing market players in Europe and the U.S.In Chapter 4, the main focus is put on the examination and evaluation of the Eurex Repo market model in order to investigate the key drivers in this model. Considering Eurex expansion to the U.S., where the originally European exchange is competing with the major North American exchange CBoT since February 2004, and the advance of Eurex main competitor Euronext, the future perspectives for the Eurex Repo market model will be explored.Inhaltsverzeichnis:Table of Contents:INDEX OF TABLESIIIINDEX OF ILLUSTRATIONSIVABBREVIATIONSV1.INTRODUCTION12.THE NOTION OF REPURCHASE AGREEMENTS 32.1DEFINITION AND CHARACTERISTICS OF THE REPURCHASE AGREEMENT 32.2COLLATERAL72.2.1T-Bonds and T-Notes92.2.2T-Bills102.2.3Pfandbriefe102.3THE PRICING OF REPOS122.4THE RISK ASSOCIATED WITH REPOS152.5THE ADVANTAGES OF REPOS172.6DIFFERENTIATION TO OTHER INSTRUMENTS182.6.1Securities Lending and Borrowing182.6.2Sell/Buy Back Agreements182.6.3Lombard Loan182.6.4Interest rate swap193.THE EUREX MARKET MODEL203.1THE ROLE OF FINANCIAL MARKETS AND FINANCIAL INTERMEDIATION203.1.1OTC Trade versus Exchanges223.1.2The Derivatives Exchange233.2THE HISTORICAL DEVELOPMENT OF THE EUREX263.3THE CURRENT MARKET MICROSTRUCTURE293.3.1Structural Features293.3.2Products323.3.3Settlement and Clearing323.3.3.1Eurex Clearing AG323.3.3.2SIC Swiss Interbank Clearing353.3.3.3SISSegaInterSettle AG383.3.4The Eurex Fee and Pricing Model393.3.5The Development of the Trading Volume413.4INTERNATIONAL COMPETITION423.4.1Europe: Euronext, Newex, Norex423.4.2United States: CBoT & CME443.4.3The Global Trend444.THE EUREX REPO MARKET ...