Repo Market Looks to Automation

Shanny Basar

An initiative to increase automated matching of repurchase agreements has been launched by Traiana and Trax as the largely manual bilateral market undergoes regulatory change.

Trax, an affiliate of MarketAxess, which provides capital market data, trade matching and regulatory reporting services, already operates a repo matching service which has largely been used between dealers, but not between dealers and clients.

Camille McKelvey, post-trade product manager at Trax, told Markets Media: “Trax has operated a repo matching service since the mid 2000s and has a strong inter-dealer and buy-side community; partnering with Traiana will allow us to expand to an even broader audience and to promote automation in a traditionally manual market.”

Traiana, a unit of Icap, provides pre-trade risk and post-trade processing solutions. Laura Craft, director, securities product strategy at Traiana, told Markets Media: “There is minimal automation between dealers and clients and we have the right tool to allow the buy-side to move to an automated model in a short period of time with minimal effort.”

Craft added that Traiana already has a lot of buy-side activity across asset classes in other products so repos are a natural fit.

Last November a study from the The European Repo Council of the International Capital Market Association said that despite the introduction of interbank screen trading in the early 2000s, the European repo market has seen little technological advancement.

The report said: “Electronic trading remains very much the domain of the banks, with limited scope for buy-side participation. Not surprisingly, those that provide trading platforms, or intermediation services, are looking to change this.”

ICMA added that the main challenge for the electronification of the repo market is that it is difficult to standardize as trades are inherently negotiated with different start and end dates, underlying collateral or specific securities, as well as counterparty credit concerns requiring credit lines and legal agreements need to be put in place between all counterparties.

“A number of banks recognize that their businesses need to become more automated, particularly with respect to the trades they execute with their clients,” added ICMA. “As operational costs continue to increase, not least in the wake of multiple proposed reporting requirements, the ability to automate and streamline the trade process, from negotiation to execution to settlement, will become ever more pressing, and could become a differentiating factor in the repo service banks provide.”

The repo matching service from Traiana and Trax is interoperable and so can be used with any execution, settlement or clearing platform.

Central clearing provides netting opportunities so firms, particularly banks, can use capital more efficiently. The ICMA study said: “The interviews with a number of desks suggest that the netting opportunities provided by CCPs are becoming far more important, despite being at a time when concerns over the robustness of the CCP risk-model, as well as the significant costs in terms of margining relative to bilateral risk-management models, are being questioned.

The report added that some of the more animated discussions related to CCPs were around the potential broadening of scope to include buy-side members. “Despite initial resistance from the bank community (who constitute the existing membership of European repo CCPs) , there seems to be a thawing in their position, again being driven by the possibility for creating more netting opportunities with their clients, even if it means that those clients are suddenly opened to a larger pool of potential counterparties,” continued ICMA.

McKelvey added: “Trax is agnostic of execution platform and settlement location, and our service allows counterparts to agree settlement details as well as the economics of a trade. This will help to cut down on settlement fails ahead of fines and forced buy-ins enforced under CSDR.”

The Central Security Depository Regulation will require mandatory buy-ins when a seller does not deliver liquid securities to the buyer within four business days, or within seven business days for illiquid securities.

McKelvey said: “There will be a big shift for the repo market with the implementation of SFTR, and this solution will help ensure that the data being reported to trade repositories is high quality.”

The incoming Securities Financing Transaction Regulation aims to enhance transparency of certain transactions that happen outside the regulated banking sector such as securities lending and borrowing transactions; repos; and buy-back/sell-back transactions.

The ICMA study said: “It has become increasingly clear that the repo market is very much in the eye of both storms and is undergoing transformation that is perhaps more radical than at any time in its history. Furthermore, much of this transformation has only just begun.”

The report said Basel III is the single greatest regulatory driver of change by making it significantly more expensive for banks to run a repo trading book. As a result, banks have reduced the amount of net balance sheet committed to repos by between 60% to 80% since the financial crisis and are centralizating liquidity and collateral management functions such as repo trading, equity finance, securities lending, treasury, and margining.

ICMA added: “It no longer makes economic or commercial sense to maintain different funding silos across various businesses, particularly as they compete for scarce and expensive balance sheet, while, similarly, bringing together the institution’s different collateral pools allows for greater optimization for both funding and margin management.”

McKelvey added: “Most other asset classes have very few manual processes so this alliance can only be a good thing, and we are ready to help automate the market.”

Featured image via bakhtiarzein/Dollar Photo Club

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