Tradition Launches Repo MTF
Interdealer broker Tradition has launched Elixium, a multilateral trading facility for collateral and secured deposits, in response to the increase in funding costs in the European repo market.
Roberto Verrillo, head of strategy and markets at Elixium, told Markets Media: “Elixium was formed as a result of balance sheet pressures and regulatory changes, which have made the intermediation of repos and secured money markets more expensive.”
The repo market facilitates secured lending, supports liquidity in bond and derivative markets, sources and mobilizes collateral, and transmits monetary policy.
However there was a decrease in the European repo market according to the European Repo and Collateral Council of the International Capital Market Association’s 31st semi-annual survey last month. There was €5,379bn of repo business outstanding on 8 June, a 4.1% decrease on the previous survey and a year-on-year decrease of 1.6%.
Liquidity has traditionally been provided by banks acting as market-makers but a study last November by Icma found there was growing concern that the cumulative impact of new prudential and market regulations, and the low rate environment, could affect the ability of the European repo market to function efficiently and effectively.
The study said Basel III is the greatest regulatory driver of change by significantly adding to the cost of capital required to run a repo trading book. “The leverage ratio (with the supplementary leverage ratio for larger US banks), is having the most profound impact on the repo market, to the point where repo is becoming unprofitable as a traded product,” added the report.
As a result most banks have already restructured or are restructuring their business models and provide repo liquidity to preferred clients as a loss-leader to support other, more profitable businesses and services.
“The bid-offer spread for repos has widened, so being able to trade at close to mid will allow Elixium users to save money,” added Verrillo.
The Icma report said: “Most innovations relate to balance sheet optimization, and creating more netting capabilities. Others are being driven by the need for improved liquidity and collateral management. Electronic solutions and improved automation are also being discussed.”
Verrillo said: “We are engaging with numerous sellside counterparties that are under regulatory pressure – they see Elixium as not only a conduit to ease net stable funding ratio pressures but also a medium through which they can direct ‘traffic’ when they are already at full capacity.”
Under Basel III, the net stable funding ratio will lead to demand for longer-dated deposits, particularly corporate deposits, where the capital treatment is more favourable for banks. Verrillo gave the example of reverse repos with non-banks with a maturity of less than one year requiring the provision of stable funding against 50% of the value of the reverse repo under the new rules.
Elixium executed its first collateral financing transaction between buyside collateral and liquidity providers this month. Citibank, as cash management agent, executed on behalf of CME Clearing Europe, while Insight Investment executed on behalf of a UK pension fund. The platform allows institutions to gain standardised access to a range of high quality liquid assets that can be traded as collateral, on an all-to-all basis, and supports pre-trade bilateral anonymity. Verrillo said Elixium is completely electronic at present but there is scope to adopt a hybrid model in the future.
Nick McCall, chief executive of Elixium, said in a statement that due to a historical lack of direct counterparty access for non-bank participants, a trade between a central clearing counterparty and an asset manager or pension fund would have previously been highly inefficient and costly to facilitate.
Tina Hasenpusch, chief executive of CME Clearing Europe, said in a statement: “CME Clearing Europe will use this platform as part of our commitment to working with the buyside to manage their liquidity challenges, including the requirement to generate cash for variation margin.”
Verrillo said: “The platform is already being used by some very prestigious institutions, and the significance of two non-bank institutions trading directly on an all-to-all basis shouldn’t be underestimated. This is a vindication of the platform and our legal docs, and there has been considerable interest since the completion of the first trade.”
He continued that Elixium is in fourth-stage negotiations with more than 75 users and in earlier stage discussions with more than 1,400 users including pension funds, asset managers, banks, treasurers and sovereign wealth funds.
Elixium has been launched in Europe but the platform aims to launch in the US next year and then in Asia.
The repo market and the efficient use of collateral will become more even more important when market participants in Europe have to exchange margin on uncleared derivatives, a regulatory requirement which has already come into force in the US, Canada and Japan. This month the European Commission agreed to force bilateral swap participants to exchange margins from January 2017.
“The platform has been born out of necessity and market demand,” added Verrillo. “We are here to fix a liquidity problem which will only deteriorate, Elixium addresses concerns for both buy and sell side customers and is built for purpose.”
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