The COVID-19 pandemic is a much-needed catalyst for change in repo markets, which were lagging behind in innovative technology adoption, according to panellists at the Securities Finance Technology Symposium.
Audience members heard that there has been a feeling of frustration among repo market participants in recent years, felt by technologists struggling to convince those holding the purse strings within their organisation to allocate much-needed resources to infrastructure upgrades.
A panellist highlighted the discrepancy between how they are able to send and receive money instantly as part of their personal banking services, but once that translated into the secured funding markets a multi-day lag appeared.
“Unlike back in those early days when the technology wasn't there, the tools are available today and it’s unclear why we aren't further forward,” the panellist representing a fintech provider lamented.
A second speaker agreed that the technologists within the market have been frustrated at the lack of momentum in adoption but acknowledged that decision makers may have been hesitant to leap into new frameworks that would cause disintermediation or require legacy technology stacks to be mothballed in an overly disruptive way.
“New technology is a disruptor in most cases, and repo is still a relationship business,” the speaker noted, which has leads to a suspicion that new tools would cause more problems than they solved. “Change is happening now but not necessarily because people want to do it but because they have to,” they added.
The rise of electronic trading, peer-to-peer platforms and treasury tools to gain greater oversight and control over a firm’s book has shrunk many sources of friction within the market, the panel suggested. The first of these trends especially has grown significantly since the vast majority of traders were forced to decamp from offices to their spare room or kitchen table overnight. Progress in these areas is unlikely to recede even after business as usual returns.
All the speakers agreed that in addition to the need to adapt to the working environment during a pandemic, recent regulations, primarily coming out of the EU, are stimulating the adoption of new technologies to meet reporting requirements and avoid penalties for settlement failures. Regulatory drivers of change are compounding and are here to stay, the speakers noted.
A third speaker highlighted that evolution within the repo market did not begin in 2020 with the onset of the pandemic, although it may have accelerated conversations. Repo businesses have slowly been gravitating from a periphery business to taking a more central role in a bank’s overall product landscape over at least the past half a decade, the panellist argued.
This greater emphasis on financing has come in tandem with the heightened demand for liquidity, also largely driven by regulation, as well as the emergence of collateral efficiency as a key growth area within both buy and sell-side entities. The ability to post collateral optimally hinges on having effective oversight of an institution's entire balance sheet, and that has led to repo taking centre stage for the first time.
Now momentum has been achieved, the panel were bullish it would be maintained and the next few years will see a significant injection of technological processes into repo markets by participants seeking efficiencies and cost savings.
“We're at a point now where there is no going back,” one panellist ventured.
As new routes to market bring a more diverse range of participants to repo markets, especially from the buy side, the overall market is likely to continue to grow in size and importance, a separate panellists concurred.
“The market can keep growing but only if it has the infrastructure in place to support it … we are heading in the right direction, albeit not as quick as we would like,” the fintech speaker concluded.
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