GLMX
Glenn Havlicek
07 August 2018
Glenn Havlicek, CEO of GLMX, discusses the OFR’s proposed data collection ruling and why the repo market is so important to the global financial market
Image: Shutterstock
The Office of Financial Research’s (OFR) proposed data collection would supposedly enhance the ability of the Financial Stability Oversight Council to identify and monitor potential risks to US financial stability. What implication could this have for repo markets down the road?
It is a complex topic. I was at J.P Morgan for 22 years and was responsible for all of our wholesale liability instrument issuance—it’s a complex ecosystem. The repo market has been the largest unknown market in the world for decades.
It is a market, which developed out of abject need for short-term financing for a variety of entities and because it evolved from an operational, sometimes referred to as a ‘back office’ perspective, there has not been a lot of transparency in those markets for a long time.
If you look back at some of the major firms that were ‘victims’ of the 2008 financial crisis, these firms relied a lot on short-term security financing.
The outgrowth of their demise led to regulators wanting, and needing, to understand the market more clearly. The challenges of the London interbank offered rate (LIBOR) scandal set off a further confluence of events in this complex ecosystem, which led to where we are today.
With that backdrop, for repo markets down the line, many from the regulatory side would suggest that more transparency into the market is important.
Therefore, the repo markets could become more transparent and that is a shock to the system to a lot of participants in that market. This is because it has been a relatively opaque market for a long time.
The proposed rule would require the submission of information by central counterparties. Given that privacy and data security has been such a global hot topic lately, will this be a point of contention?
At GLMX, we are constantly thinking about privacy both in the context of privacy itself but also in the context of secure access to our systems.
There are a lot of examples out there, look at the various stock markets around the world, where clear information on transactions is provided. For example, if you want to know the price of a share of Apple stock, it is not terribly difficult to find that out in real time. The information of who bought and who sold would probably not want to be revealed to the world so there are mechanisms in place to make it anonymous.
The decision widely will be that a clearer view in to the repo market is of greater utility to financial society than the risk of anonymised disclosure.
Cleared repo data from the proposed collection will be used to enhance the production of the SOFR. What are your views on this?
In my opinion, secured overnight financing rate (SOFR) does not exist in the absence of LIBOR and the subsequent problems of LIBOR. LIBOR was a construct from the late 1960s and early 1970s, which allowed loans to be priced objectively.
The market underlying US LIBOR—the euro-dollar deposit market—at that time was fairly large and robust.
LIBOR was a straightforward way to address objective pricing of loans to institutions who aggregated and sold off pieces of loans. In the early 1980s, with the advent of eurodollar futures and then options, you wound up with a situation where eurodollar futures were the largest volume futures contract in the world.
Other derivative instruments, like interest rate swaps, also became colossally larger than the underlying deposit market, which was being used to price them. This became the foundation of the problems that befell LIBOR.
With that in mind, and to avoid those pitfalls today, we would develop a reference rate like LIBOR differently than the market did 50 or more years ago. The industry needs to have objective information, and the more objective information you have the better.
Repo is one of the most active markets in the world, and it’s a multi-trillion dollar market globally. From an underlying market of this size, reliable reference rates can be derived.
The data extracted from the repo market will have to represent a non-trivial portion of the marketplace and if you want to create an effective, objective, defensible index. In fact, extracting data for a clear repo reference rate should be relatively straightforward and uncontroversial.
The OFR said the proposed rule will mean minimal regulatory burden. To what extent would you agree with that?
The ecosystem proposes a significant regulatory burden on market participants. We see it everyday and people talk about it every day.
Data already are readily available for cleared repo; a transaction occurs and it fits in the databases of all entities and it fits in the database of a central entity—in the US most likely a systemically important institution—which is well-versed in reporting.
The repo market also includes a lot of bilateral transaction—that is non tri-party. Tri-party in the US can be reported through a traditional tri-party agent.
Cleared repo also includes three parties and should offer similar data availability and getting that information for bilateral repo is a lot more challenging than the cleared items.
GLMX is seeking to provide an information flow from those markets. Our view is that we can capture that data and provide it on behalf of our clients, which enhances the objectivity and relevance of a reference rate like SOFR.
If this proposed collection rule isn’t put in to place, what could be a possible alternative?
GLMX is part of that solution. One of the reasons that we are in this business is because a well functioning repo market is globally critical. The reason the US market is robust, and a beacon for high levels of liquidity, is because people can buy and sell quickly. Repo and the securities lending market are absolutely integral to being able to do that.
I think if the collection rule isn’t put into place, it has implications for something like SOFR. It won’t necessarily have catastrophic implications for the repo market itself. It would make it harder for SOFR to be an objective and reliable indicator, though.
Technology to me is the alternative, it is the way to improve the US repo market in the context of providing a viable alternative to LIBOR.
At GLMX we believe the technology we provide will be helpful to the ecosystem. We are not looking at it as a single effort, we are looking at it as a much broader ecosystem. It’s a complex ecosystem and a comprehensive understanding of how it works, which we at GLMX possess, is critical to providing real solutions.
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