Tim Hogben of the Australian Securities Exchange discusses the growth of Australia’s repo business and how it is changing the way the country’s financial markets operate
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What is ASX’s role in Australia’s financial markets?
The Australian Securities Exchange (ASX) is at the heart of Australia’s financial markets, offering a full suite of services, including listings, trading, clearing and settlement, across a comprehensive range of asset classes.
ASX has over 150 years of exchange experience and a highly skilled team of around 630 people. We put our customers at the centre of everything we do—6.7 million share owners, 180 participants, and more than 2,200 listed companies and issuers.
As the first major financial market open every day, ASX is a world leader in raising capital, consistently ranking among the top five exchanges globally.
With a total market capitalisation of around $1.85 trillion, ASX is home to some of the world’s leading resource, finance and technology companies. Our $47 trillion interest rate derivatives market is the largest in Asia and among the biggest in the world.
Market leading technology has always been a focus for ASX. Our network and data centre are connected to leading financial hubs. Speed, reliability, state-of-the-art technology and the diversity of the user community are fundamental to the success of the Sydney-based ASX Australian Liquidity Centre, which opened in 2012.
It’s a compelling time for financial markets. There’s increasing demand for new and contemporary financial products and services, and a desire to leverage the opportunities presented by fresh technologies to transform the way exchanges and financial services operate. This stimulates innovation and growth opportunities, thereby improving efficiency and lowering the cost of back-office processes.
ASX recognises the role we play in financial markets comes with great responsibility—to invest in new products and services to help grow the market and, just as importantly, to enhance the resilience and reliability of the critical infrastructure we operate.
What relevant services does it offer participants?
The ASX Collateral tri-party collateral management service was launched in 2014. ASX Collateral connects collateral givers and cash providers on a secured financing repo and securities lending platform, with the advantage of trades being safe-settled via Austraclear. It can also be utilised for central counterparty (CCP) and over-the-counter (OTC) margining. ASX operates in a regulatory environment that meets the highest global standards. Our clearing houses are among the most secure and well capitalised in the world, and help underpin the stability of Australia’s financial markets. In 2016, T+2 settlement was implemented for the equity market.
In December 2017, we announced our intention to replace Clearing House Electronic Subregister System (CHESS) using distributed ledger technology (DLT) developed with our technology partner Digital Asset. CHESS is the post-trade system used by ASX to record shareholdings and manage the clearing and settlement of equity transactions in Australia. This will be transformative for the Australian financial markets and a global first, with go-live planned for Q1 2021.
Replacing CHESS with a DLT solution will significantly simplify and speed-up post-trade processing. For ASX clients, this should remove risk and reduce back-office administration and compliance costs. While investors could experience significantly faster settlement of equity transactions—potentially in near real-time.
Adoption of DLT has the potential to stimulate greater market innovation and lead to the development of new services for intermediaries, end-investors and listed companies. This would create a more competitive marketplace across a broad range of services.
ASX is always seeking to leverage its expertise and infrastructure to provide opportunities for our customers. A good example of this is the recent development of a new data platform to improve the range, availability and analytics of data. We recognise data is now very much seen as a strategic asset. So building capability to provide better customer insight, decision-making and potential growth opportunities is a must.
Australia’s fixed income repo market has grown in recent years. What has contributed to this success and do you see this growth continuing this year?
Looking at the RBA repo figures, the average RBA repo balance for 2018 was AUD 62.9 billion, up 15 percent from 2017. The average percentage of RBA repo trades executed via the ASX Collateral tri-party service increased from 28 percent in 2017 to 34 percent in 2018, with the average ASX Collateral balance up 44 percent to $21.5 billion in 2018.
The weighted average repo rate in 2018 was 1.95 percent with an average term of 40 days. This was 45 basis points above the official cash and 10 basis points higher than the average one-month unsecured bank bill rate. This compares to 2017, with a weighted average repo rate of 1.73 percent and 38-day term. This was 23 basis points over cash and 11 basis points over average unsecured one-month bank bills.
The focus for the banks has been to manage their net stable funding ratio (NSFR) and the liquidity coverage ratio (LCR) ratios, optimise their holdings of high-quality liquid assets (HQLA) and fund their trading inventory. Repo has played a key part in the management of their short-term liquidity needs. However, as seen in the numbers, the cost to participate in repo has increased substantially in the past two to three years and has enhanced returns for cash providers above unsecured levels. We are seeing continued interest from new entrants looking to enter the AUD secured funding market, particularly via the ASX Collateral tri-party platform. This includes interest from offshore banks, local superannuation funds and from corporates.
An interesting case study is the ASX Clearing Corporation (ASXCC). ASXCC manages AUD 8 billion of cash received from margining activities across the ASX clearing houses. It has a robust investment mandate with a conservative risk profile. ASXCC shifted its re-investment activities from unsecured to a blend of unsecured and secured lending via repo. This provides the flexibility to optimise returns across the respective markets as short-end rates shift, particularly around quarter and year-ends, without changing their maturity profile. It also offers the ability to operationally scale the activity by executing repo via ASX Collateral tri-party.
From an OTC Clearing perspective, the ability of participants to convert HQLA to cash via repo for OTC derivatives margin is an important driver. ASX also provides the benefit of being able to cross-margin between OTC derivatives and listed futures positions, and then automatically lodge and substitute non-cash collateral via ASX Collateral on daily net margin positions.
How is the repo industry changing Australia?
The main themes have been tighter funding markets and adjustment to regulatory changes. Tighter AUD funding markets have been driven by a combination of onshore and offshore effects. Increased US treasury bills issuance, US capital repatriation and continued tapering of the US Fed reverse repo facilities have all drawn liquidity out of the system pushing up rates.
Given the reliance of the Australian banks on the US markets to raise funding, the cost to swap US Dollar (US) back to Australian Dollar (AUD) has increased, as reflected in wider cross-currency swap basis and foreign exchange (FX) forward rates.
Domestically, bank balance sheets have been adjusting to NSFR requirements and absorbing the cost of the ASIC banking levy.
Structurally, as per the earlier numbers, there has been a continued shift towards the use of tri-party for fixed income repo as banks look to optimise and scale their business models, reduce operating costs and operational risk, and maximise returns.
What does the future landscape look like?
ASX is looking at a number of opportunities across the Australian financial markets ecosystem.
The most high profile are the opportunities arising from the replacement of CHESS with our DLT solution. There are currently separate stores of data across the market creating risks, inefficiency and costs. Our DLT implementation can create a real-time, shared source of truth while preserving participants’ data privacy.
Users, including ASX, will be able to develop new applications directly from the ledger data to create more efficient client and internal workflows, greater data analytics, risk and compliance automation, and cost savings. They can do this through reduced reconciliations and real-time position updates. There is also the potential to retire existing tools and systems.
We will keep a close watch on market conditions in the coming 12 months as the various geopolitical and economic situations play out across the globe, including Brexit, the US and China, interest rate differentials, outcomes from the Australian banking Royal Commission, the Australian housing market and the Australian Federal election.
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