Burhan Khadbai is Head of Content, Sovereign Debt Institute at OMFIF.

Boosted liquidity and price discovery among benefits of deep market for sustainable repurchase agreements

Repurchase agreements are an obscure but important part of the bond market and wider financial system, with trillions of dollars’ worth of securities traded every day. The rapid growth of the green and sustainable bond market issued by sovereigns in recent years has led to the slow emergence of a repo market for these transactions.

Acting as a type of short-term borrowing for dealers in sovereign bonds which are sold onto investors, a dealer sells these securities and then agrees to repurchase them at a higher rate.

In the sustainable repo market, there are two types of transactions. The first involves repos that act as collateral for sustainable bonds. These repos do not directly fund sustainable projects but rather provide ancillary benefits for the broader sustainable finance ecosystem. This includes increased liquidity and better price discovery of sovereign sustainable bonds, which are the standard benefits of conventional repos. The other type of sustainable repo is the cash leg, which allows issuers to immediately refinance sustainable assets between issuances.

Improving liquidity is particularly important for the growth and development of green and sustainable bonds, according to Robert White, head of the green and sustainable hub for the Americas at Natixis.

‘Sovereigns often have been known to sometimes limit the size of their inaugural sustainable bonds due to liquidity concerns and are then concerned about how to build out the curve and what maturities to issue in,’ said White. ‘In an ideal world, a deep sustainable repo market can remove and mitigate those concerns.’

At present, however, the sustainable repo market is still in its infancy. ‘It’s really early days with less than 20 sustainable repo transactions in the market to date,’ said White. ‘But the emergence of this market is a nice indicator that we have hopefully reached a tipping point for the sovereign sustainable bond market and that we can now unlock repos and those repos can lead to more issuance.’

In the last couple of years, a number of banks have executed inaugural green and sustainable repo transactions, including Natixis, which executed a ‘triple’ sustainable repo with Banco de Brasil earlier in 2024. It was the first deal of its kind to combine three sustainable elements in a single transaction to support Banco de Brasil’s sustainability-linked bond framework.

The International Capital Market Association has been crucial in helping accelerate the growth of the sustainable repo market, with ICMA’s Repo and Sustainability Taskforce launching a survey on the market in February 2024 following a paper in 2022 and an initial consultation paper in 2021.

The results of ICMA’s 2024 survey pointed to a clear call for further dedicated guidance to cover all types of sustainable repos. The survey also found that 75% of respondents said the development of the green repo market’s best practices and industry guidelines would enhance the liquidity of transactions involving sustainable collateral.

More work is needed to grow the green and sustainable repo market but its emergence should be welcomed as a positive sign: not just of the maturity of the wider sustainable capital markets but as a step towards strengthening them too.