It is safe to say that one of Tradeweb’s core focuses is on the repo market. How would you describe the current landscape within this market, and what trends are you seeing?
Is repo a target and a core focus area for Tradeweb? Unequivocally, yes.
If you think about what Tradeweb does in the fixed income space, there is cash and derivatives. Repo is the other big building block in having a very comprehensive product offering across the institutional fixed income space. Financing is very relevant for the provision of liquidity in the cash markets, so not only does it make sense in terms of coherence, but it also supports the liquidity that financing can add to the cash market.
From a commercial perspective, repo is very much behind compared to most of these markets that have embraced electronification for a lot longer. We aim to leverage some of the technology we built elsewhere for the purpose of adjusting it and making it available in repo. As it provides a synergetic value, a commercial opportunity, and given where markets are today, it is a no-brainer for us to be engaged in the repo space.
We are increasing the amount of resources that we are allocating to this product. We are firmly committed and committed for the long term.
From a client, dealer, and technology provider’s perspective, the trends we are seeing for each are not vastly different. The first clients to embrace electronification were institutions that used leverage — hedge funds and the UK liability-driven investment (LDI) community. Now, there are even more investor types that are looking to embrace repo electronification.
For the existing clients, there is a desire to be more efficient. Market participants are looking to better integrate with their risk systems and their order management systems (OMS). Tradeweb has work underway to ensure the functionalities we support through our user interface (UI) are equally supported through clients’ OMS.
Dealers who first embraced electronification, typically managed client enquiries through our UI, but now they feel it is not a scalable model anymore. There is demand to upgrade connectivity to the next level via API, provide pre and post-trade STP, and develop algo pricing capabilities. Electronification will ultimately increase the number of trades. So, from a dealer’s perspective, the ability to accommodate scalability and to facilitate higher trading volumes is definitely a priority.
In terms of other priorities, we feel positively about the dealer network that we have been building. We currently have 43 dealers supporting the platform in Europe. There is a lot of work to do from a product development perspective. We are very focused on open-ended repo and providing a good lifecycle management tool that works within the platform. Tradeweb is also looking at supporting additional repo workflows.
In June, Tradeweb announced the bridging of its repo and interest rate swap product offerings to enhance execution workflows in these markets. Can you tell me more about the decision to connect the two offerings?
We are well-positioned because we have repo on one side, but we can also leverage the swaps platform on the other. How can we use that for the purpose of creating solutions that are valuable to our clients? There are two functionalities here, the first is the ability to electronically execute OIS trades to manage the interest rate exposure of their long-dated fixed-rated repo transactions.
After completing the repo trade, the system will allow users to open up a swaps ticket, which is pre-populated with a number of fields — the cash proceeds, the start date, and the end date — all of which have been taken from the previously-executed repo trade for the convenience of use. It allows for a more seamless execution and reduces operational risk. We think it is going to be valuable for those clients to have immediacy and efficiency, when managing their interest rate risk and liquidity risk.
The second function is broader in terms of its applicability, and it impacts any repo platform user. In the negotiation of an request for quote (RFQ), clients will be able to see for every dealer the quoted fixed rate and its spread to the OIS curve, whether it is ESTR, SOFR or SONIA. This is available across the three currencies; euro, US dollar and UK sterling.
At the point of execution, Tradeweb will provide users with an immediate sense of the cost of that funding trade versus OIS, which is very valuable. This information will be available post-trade, allowing clients to build a repository of these trades to better inform future investment decisions.
Broadly speaking, the strive for greater efficiency and scalability is a core focus for the market. How is Tradeweb working to achieve this goal?
Efficiency and scalability are the main catalysts for electronification for the overwhelming majority of our client base. We aim to connect with a broader number of clients and, ultimately, serve the community in a much more holistic way.
In terms of connectivity, there is a lot of work to do here. For unsolicited clients, clients that do not use an OMS, it is relatively easy to connect to the Tradeweb platform. As our client base expands from the hedge fund community to others entering the space, ensuring OMS connectivity is going to be more and more relevant.
We believe in the full value of electronification. Ultimately, the end game for our clients, buy side or sell side, is not to just interface with our UI, but we are always keen to provide flexibility to ensure that all of our functionalities are supported through FIX API.
If I look beyond the repo market and ask: what are the trends that are relevant in other markets that we see here at Tradeweb? And, do I think that some of those trends could become relevant for readers? The answer is yes. The two big trends are automation and the use of data.
AiEX is our rules-based automated execution protocol and, while it is not yet available for repo, automation adoption is fast accelerating in many other asset classes. In European government bond cash trading, clients used AiEX to complete about 40 per cent of the tickets in 2020, and now it is closer to 70 per cent. I could envision a similar trajectory happening in the repo space at one point.
Data and automation are really coming together to enhance trading workflows. These are trends worth paying attention to, and we certainly see them defining the future evolution of our products. And we do see that, potentially, they will become relevant in the repo space as well.
As a whole, how would you describe the repo market’s performance in terms of efficiency and scalability? What is missing for the market to further evolve?
The reality is, pipes in the repo space have been problematic. Ultimately, firms want to streamline their workflows from the point of execution. But if pipes are not fit for purpose and, for example, the settlement ratios worsen as a result of an expected increase in the number of trades, then it means that there is a more fundamental problem to solve, which goes beyond the point of execution. For repo, that is definitely the case.
The International Capital Market Association (ICMA), and other industry-wide associations, have been clear in highlighting how working on pipes is relevant for the industry. Settlement ratios remain subpar and are not where they should be. Regulatory discussion on mandatory buy-ins and settlement penalties took momentum precisely because settlement was not where it was meant to be. There is still work to be done here.
The second point is standardisation. In many of our efforts around electronification, we have faced standardisation challenges. We need to agree on a common way of dealing with workflows.
Tradeweb has been working closely with ICMA, which has been working on a Common Domain Model (CDM) for repo. Anytime we saw discrepancies in the way the industry was operating, we reached out to ICMA and tried to find a standardised solution.
How is client demand, upcoming regulation, and advances in your technology stack, shaping Tradeweb’s development strategy?
Regulation is a big e-trading driver. We are always keeping an eye on what is upcoming, which in turn could be driving industry trends and changes to the market structure. In the securities finance space, there are two big regulatory changes that could shape the industry in the years to come.
The first is T+1 in Europe. We have just finished the T+1 exercise in the US, and it has been successful. In the first week of implementation, 93 per cent of RFQs initiated on in-scope instruments happened on a T+1 settlement cycle. Only seven per cent of the time, buy side firms felt that they were not ready for the shorter settlement cycle — that is an exceptional result.
I am worried that in Europe, on the wave of this very successful implementation in the US, the industry will be forced to accelerate towards a European implementation of T+1. The challenge in Europe is that the market itself is far more complex than in the US. First, because it involves a more fragmented ecosystem — in terms of the number of CSDs and ICSDs and the bond realignment that needs to happen across them.
In the US, Treasuries were already operating on T+1. In the UK, gilts settle on T+1. In Europe, all government bonds are still operating on a T+2 basis. In-scope securities, as part of the European implementation of T+1, will then include both corporate and government bonds. As a result, the scope will be much broader. And this has ramifications, not just in terms of in-scope asset classes but also from an intraday liquidity perspective and for the repo market. Electronification is going to help incredibly, but without work on the pipes, this is going to be a challenging transition.
The second regulation we are focused on is mandatory clearing in repo for Treasuries. It is US focused for now, certainly driven by the dash for cash in March 2020; the regulatory community wants better visibility on basis trades and to reduce the leverage in the system. Mandatory clearing will help achieve this.
The market structure in Europe is different. The dash for cash in March 2020 was predominantly a US dynamic, which is also why it is less of a priority for European policymakers.
After a successful transition to T+1 in the US, policymakers in Europe now want to move in the same direction. We are watching the US mandatory clearing initiative very closely, because even if the situation is different, even if the market structure is different, a successful implementation of mandatory clearing in the US is likely to accelerate a very similar regulatory push in Europe.
Can you share with me the firm’s core focuses over the coming 12 months, and of any projects you have in the pipeline?
We are very focused on repo product development and keen to work with our clients to resolve a number of challenges, whether it is around execution, or potentially addressing the broader market infrastructure constraints. There are a number of initiatives that are about to go live at Tradeweb.
We will soon be introducing dealer axes, similar to what we offer in other products, but adjusted to the specific needs of the repo market. The sell side has the ability to publish axes to a select group of clients, and those clients can then initiate RFQs on the basis of the axes they have seen being published by the sell side.
The second initiative is what we call ‘Locates’, which is more relevant for credit and emerging markets. The introduction of Locates will nicely complement our product suite for those asset classes.
With lifecycle management for open-ended repos, and now Locates, we will have a product offering that will be fit for purpose across the entire credit and emerging markets space.
We have a third functionality we are very excited about, which is multi-tenor pricing. It is, essentially, the ability for the buy side to build and negotiate RFQs for multiple maturity dates on the same list, and then trade on the best tenor. The spread to OIS functionality is going to be incredibly helpful when paired with the multi-tenor pricing workflow. We are bringing information from our swaps platform into the workflow, so traders can decide what the most convenient repo rate is by looking at its OIS spread equivalent.
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