Reaping the rewards
09 July 2019
John Edwards, managing director of BrokerTec Europe, explains why there has been significant growth in EU repo trading
Image: Shutterstock
What are the current market drivers for EU repo trading?
BrokerTec currently operates an existing dealer-to-dealer repo trading venue in Europe (and the US) for trading specific, general collateral (GC) and tri-party repo in the Euro sovereign debt markets. We have continued to see significant, meaningful growth over the last two to three years, which is evidenced by the numbers that we publish monthly for the repo sector, which includes both Euro denominated and UK Gilt sterling repo trading.
There have been a number of market and macro-economic drivers which continue to drive growth in terms of volume traded, as has been seen on BrokerTec. There remains a strong demand for high-quality liquid assets (HQLA), against the recent backdrop and activity of the European Central Bank Quantitative Easing programme and short supply of certain issues. Over the last three years or so, the market has benefitted from changes to derivatives margining requirements and we have seen the increased appetite for collateral through repo trading as a more secure form of trading collateral and a very liquid secondary market with the settlement and netting benefits derived from a cleared central counterparty (CCP) execution solution.
Although the CCP is a key component of our business, the deep liquidity pool and commercial offering are fundamentally important. Many financial institutions have gone through cleaning up exercises on their balance sheets and are currently enjoying greater balance availability for their repo activity.
Additionally, some increase in activity may be derived from regulatory developments. Even though the second Markets in Financial Instruments Directive (MiFID II) only partially impacted the repo and securities lending markets, it has definitely helped to focus on transparency, audit trails and reporting, where electronic trading solves many of these issues easier particularly against the old school voice broking activity. Right now, though, Securities Financing Transactions Regulation (SFTR) is very much on everyone’s mind.
Why do you think we are seeing an increased demand for collateral?
This links back to changes in capital requirements (net stable fund ratio and liquidity ratios and buffers) with higher demand for liquid assets to be held as capital. This is as well as a longer-term shift from unsecured to secured forms of funding.
At BrokerTec, what trends are you currently seeing among clients?
So far this year, we have continued to see growth across pretty much all Euro sovereign and UK Gilt markets, with record volumes and trade counts in most of these sectors; March and April were very strong performing months. We anticipate that demand for repo and collateral in those markets will continue to grow. Dealers and the major international banks are leveraging the deep liquidity pool in the dealer to dealer (D2D) space to manage an increasing amount of what was typically bank to client flows, with more of this inventory finding its way into the wholesale markets as banks typically carry less inventory now.
Access to this liquid market, providing real cost efficiencies in terms of straight-through processing, order management and balance and settlement netting opportunities plus certainty of execution and collateral availability are drivers in themselves, and Broker Tec is on the cutting edge of this service. We are also seeing some changing trends which segway into the BrokerTec Quote initiative, driving change and providing a real solution for dealer-to-client, repo request for quote (RFQ). This is probably one of the last asset classes to adopt electronic execution.
MiFID II focused many views and opinions on the future evolution and what would be required to limit the pain and increased workload under SFTR for repo traders. Naturally, this type of automation in the execution piece also brings technical efficiencies and cost savings in the work flow–particularly post-trade.
Traditionally, this activity has been transacted over the phone or email/Bloomberg, and there is now a demand to look at something which is more transparent and starts to deliver some real efficiency from both an execution and straight-through-processing perspective over a longer period of time. The seed change in this space really started in Q2 2018 but space is only just hotting up and the race is far from won.
You recently launched BrokerTec Quote. How will this benefit clients?
We are targeting a pilot go-live and production ready before the end of June 2019. The initial launch will be a small number of dealers and buy-side clients. We are working with a very agile and flexible technology partner in building out this new execution solution, enabling us to offer something which is intuitive, easy to use, and has rich functionality to support the workflow and mechanisms unique to both RFQ and more so to repo trading.
In 2018 we set up and established a Repo Working Advisory Group with representation from both the banks and the buy-side side to help us to determine the workflow and what features and functionality are fundamentally important. We will release and upgrade several iterations following go-live and before year end 2019 that will broaden our scope and products that can be traded including the likes of GC and open repo, which will also allow us to further diversify and target different buy-side organisations.
This initiative is a change of direction as BrokerTec has historically existed across several different asset classes, both within Europe and the US, in what has predominantly been a wholesale secondary market. While this clearly leverages a lot of the existing client base from the bank or dealer perspective as more typical liquidity providers, it also allows us to target a different demographic on the buy-side; we have been very pleased and encouraged by the level of interest from that perspective, ranging from hedge funds to asset managers. There is competition in this space, but it is early days and the market opportunity is meaningful.
The identity and recognition of the BrokerTec name within the D2D space holds real strength, even within the buy-side or end-users in our ability to work collaboratively in a manner that looks to solve and partner for our clients and deliver something that is very credible in terms of the trading experience.
BrokerTec currently operates an existing dealer-to-dealer repo trading venue in Europe (and the US) for trading specific, general collateral (GC) and tri-party repo in the Euro sovereign debt markets. We have continued to see significant, meaningful growth over the last two to three years, which is evidenced by the numbers that we publish monthly for the repo sector, which includes both Euro denominated and UK Gilt sterling repo trading.
There have been a number of market and macro-economic drivers which continue to drive growth in terms of volume traded, as has been seen on BrokerTec. There remains a strong demand for high-quality liquid assets (HQLA), against the recent backdrop and activity of the European Central Bank Quantitative Easing programme and short supply of certain issues. Over the last three years or so, the market has benefitted from changes to derivatives margining requirements and we have seen the increased appetite for collateral through repo trading as a more secure form of trading collateral and a very liquid secondary market with the settlement and netting benefits derived from a cleared central counterparty (CCP) execution solution.
Although the CCP is a key component of our business, the deep liquidity pool and commercial offering are fundamentally important. Many financial institutions have gone through cleaning up exercises on their balance sheets and are currently enjoying greater balance availability for their repo activity.
Additionally, some increase in activity may be derived from regulatory developments. Even though the second Markets in Financial Instruments Directive (MiFID II) only partially impacted the repo and securities lending markets, it has definitely helped to focus on transparency, audit trails and reporting, where electronic trading solves many of these issues easier particularly against the old school voice broking activity. Right now, though, Securities Financing Transactions Regulation (SFTR) is very much on everyone’s mind.
Why do you think we are seeing an increased demand for collateral?
This links back to changes in capital requirements (net stable fund ratio and liquidity ratios and buffers) with higher demand for liquid assets to be held as capital. This is as well as a longer-term shift from unsecured to secured forms of funding.
At BrokerTec, what trends are you currently seeing among clients?
So far this year, we have continued to see growth across pretty much all Euro sovereign and UK Gilt markets, with record volumes and trade counts in most of these sectors; March and April were very strong performing months. We anticipate that demand for repo and collateral in those markets will continue to grow. Dealers and the major international banks are leveraging the deep liquidity pool in the dealer to dealer (D2D) space to manage an increasing amount of what was typically bank to client flows, with more of this inventory finding its way into the wholesale markets as banks typically carry less inventory now.
Access to this liquid market, providing real cost efficiencies in terms of straight-through processing, order management and balance and settlement netting opportunities plus certainty of execution and collateral availability are drivers in themselves, and Broker Tec is on the cutting edge of this service. We are also seeing some changing trends which segway into the BrokerTec Quote initiative, driving change and providing a real solution for dealer-to-client, repo request for quote (RFQ). This is probably one of the last asset classes to adopt electronic execution.
MiFID II focused many views and opinions on the future evolution and what would be required to limit the pain and increased workload under SFTR for repo traders. Naturally, this type of automation in the execution piece also brings technical efficiencies and cost savings in the work flow–particularly post-trade.
Traditionally, this activity has been transacted over the phone or email/Bloomberg, and there is now a demand to look at something which is more transparent and starts to deliver some real efficiency from both an execution and straight-through-processing perspective over a longer period of time. The seed change in this space really started in Q2 2018 but space is only just hotting up and the race is far from won.
You recently launched BrokerTec Quote. How will this benefit clients?
We are targeting a pilot go-live and production ready before the end of June 2019. The initial launch will be a small number of dealers and buy-side clients. We are working with a very agile and flexible technology partner in building out this new execution solution, enabling us to offer something which is intuitive, easy to use, and has rich functionality to support the workflow and mechanisms unique to both RFQ and more so to repo trading.
In 2018 we set up and established a Repo Working Advisory Group with representation from both the banks and the buy-side side to help us to determine the workflow and what features and functionality are fundamentally important. We will release and upgrade several iterations following go-live and before year end 2019 that will broaden our scope and products that can be traded including the likes of GC and open repo, which will also allow us to further diversify and target different buy-side organisations.
This initiative is a change of direction as BrokerTec has historically existed across several different asset classes, both within Europe and the US, in what has predominantly been a wholesale secondary market. While this clearly leverages a lot of the existing client base from the bank or dealer perspective as more typical liquidity providers, it also allows us to target a different demographic on the buy-side; we have been very pleased and encouraged by the level of interest from that perspective, ranging from hedge funds to asset managers. There is competition in this space, but it is early days and the market opportunity is meaningful.
The identity and recognition of the BrokerTec name within the D2D space holds real strength, even within the buy-side or end-users in our ability to work collaboratively in a manner that looks to solve and partner for our clients and deliver something that is very credible in terms of the trading experience.
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