Securing the repo lifeline: how technology is driving the market
30 May 2023
Demand for automation, workflow and straight-through processing is on the rise in an expanding repo market. Industry participants discuss the pain points for new entrants and the complexities within this space as they drive for further standardisation. Carmella Haswell reports
Image: Andrew Davis
Repo trading — a lifeline to capital markets for primary issuance and secondary market liquidity, and an important investment and funding vehicle for the broader securities finance industry — continues to grow.
One consequence is that banks and asset managers are increasing investment in their post-trade capabilities to support the expansion of their repo market activities, notes HQLAX CEO Guido Stroemer.
“If you look at collateral management and repo, it used to be viewed as an operational headwind that institutions supported with limited strategic planning,” Stroemer confirms. “But now, it is transforming into a strategic differentiator. Firms that manage collateral efficiently can differentiate themselves and deliver meaningful bottom line results for their shareholders.”
A recent European Repo Survey revealed that the total value outstanding of repos and reverse repos on the books of 61 institutions on 8 December 2022 had grown to a record high of €10,374.2 billion, a 12.8 per cent rise year-on-year. Furthermore, data provided by automatic trading systems (ATS) in Europe pinpointed a further acceleration in the growth of repo trading value.
According to the International Capital Market Association (ICMA) European Repo and Collateral Council (ERCC) survey, the outstanding value of repos executed on these platforms increased 15.7 per cent to €1,651.4 billion on 8 December 2022, compared with the previous survey in June 2022.
With rapid growth in the market, industry participants are reviewing the evolving repo space and how technological innovation can be leveraged to support its enhancement.
For Ed Tyndale-Biscoe, product owner for secured funding at ION Group, there has been a “sea change” in the way people view technology and what it is capable of — due, potentially, to the pandemic and the wider need for people to be able to communicate more effectively. Repo, according to Tyndale-Biscoe, has “historically been something of a back office, less of a front-office focus, profit centre-minded business”. He notes that the technology in the repo space has been “undeserving of the business”.
“The hybrid nature of the market is changing. The interdealer markets, which are a fundamental part of how wholesale operations work, the RFQ platforms, which allow other participants to access those markets, the integration complexity to deliver all the necessary decision-making inputs and the cognitive load this implies from the front office point of view have created a complex situation,” says Tyndale-Biscoe.
Managing this setup on a desktop — with several different screens, inventory, pricing, real-time or T+1 margin — is “impossible”, notes Tyndale-Biscoe, unless it is fully integrated and totally standardised, front-to-back.
Addressing the addressable market
Technology is driving a market solution, technology is not leading us to a market solution, says Travis Keltner, global head of repo financing at State Street.
Keltner notes that to identify a solution, it is imperative to adapt to that market and understand the problems and challenges it presents, as well as the opportunities to leverage technology. “As related to repo, it is key to understand the foundational makeup of our current short end as it has changed dramatically over the last few years,” he adds.
Regarding the overarching macro landscape at the short end, Keltner makes reference to the recent headlines highlighting concerns around the “debt ceiling”, suggesting that there are going to be “all types of questions evolving” and a “number of money market considerations” around this.
Also known as the ‘debt limit’, the debt ceiling is the maximum amount of money the US Congress allows the federal government to borrow to cover its bills. As the government edges closer to its debt limit, Congress has yet to decide whether to raise or to suspend the ceiling. Headlines have reported fears that if the ceiling is not raised, then this could cause the US to default on its debt and, potentially, lead to major economic damage.
Once dominated by email, excel sheet and telephone calls, the repo market is now facing a demand for automation, workflow and straight-through processing (STP) from a post-trade perspective. Colleen Stapleton, product manager for match and repo products at MarketAxess, says the catalyst for this shift came from the introduction of the Central Securities Depositories Regulation (CSDR) and the conversations around the looming T+1 settlement cycle — which will come into effect in May 2024 for the US and Canada.
Stapleton indicates that middle-office and operations personnel now understand the need to insert technology, automation and efficiency into their workflows. Although the industry does not appear to be there yet, in terms of standardisation in the repo market, Stapleton is confident that “we are getting there” with the help of industry working groups.
However, at MarketAxess, the firm is finding pain points with booking behaviours around events. Stapleton indicates that certain counterparties have bought into an event workflow, while other counterparties are very focused on a cancel repo workflow. “When you are looking for STP opportunities and bringing communities together,” Stapleton observes, “those kinds of differences lead to bottlenecks.”
Stapleton calls for action in this respect, where the industry, as a community focused on securities finance, looks for additional security and standardisation opportunities, especially around booking, rerates and new prices. “All of this leads to the bottomline, which is the need to continuously build our operational resiliency through STP platforms with solution providers, to help reduce some of the touch that our operational professionals are dealing with today,” she adds.
Time is of the essence for any reporting cycle or settlement cycle, affirms Mark Pekala, vice president of fixed income product management at Broadridge. He continues: “In that regard, it is of the utmost importance to have higher STP rates so that we can bridge the gap between the front, middle and back-office ecosystem, so that they are interoperable, so that everything is in sync with one another.”
For Pekala, interoperability has to be key so that every platform is compatible, he says, so that any solution offered is compatible with another solution. “This way, it really drives the innovative spirit of STP across the board and eliminates bottlenecks, which are of the utmost urgency and importance.”
“The addressable market for repo is underestimated,” says Keltner. Executing repo for market participants is not a simple process, it is not just a trade but also matching, systems integration, settlement and delivery, not to mention margining and reporting. Keltner describes the technology in this space today as “really powerful”, as the entity can be used to expand the addressable market and bring in additional repo participants. However, connecting the right technology vendor and partner with the right user is “not an easy dance”.
While industry participants look to expand the repo market, new entrants are facing barriers to entry from a technology point of view. Tyndale-Biscoe explains that this is due to the difference between the systems involved as well as the complexity of the integration landscape. Furthermore, the budgets required to deploy a complex solution are significant, although these are gradually decreasing, according to Tyndale-Biscoe.
Tyndale-Biscoe indicates that as technology becomes more standardised in the repo segment, vendors will be able to deliver much more “shrink-wrapped” or “out-of-the-box” solutions, which are easier to manage and more cost effective from both the end user and vendor perspective. He concludes: “That is an important aspect of how to grow the size of the market globally and increase the addressable market.”
One consequence is that banks and asset managers are increasing investment in their post-trade capabilities to support the expansion of their repo market activities, notes HQLAX CEO Guido Stroemer.
“If you look at collateral management and repo, it used to be viewed as an operational headwind that institutions supported with limited strategic planning,” Stroemer confirms. “But now, it is transforming into a strategic differentiator. Firms that manage collateral efficiently can differentiate themselves and deliver meaningful bottom line results for their shareholders.”
A recent European Repo Survey revealed that the total value outstanding of repos and reverse repos on the books of 61 institutions on 8 December 2022 had grown to a record high of €10,374.2 billion, a 12.8 per cent rise year-on-year. Furthermore, data provided by automatic trading systems (ATS) in Europe pinpointed a further acceleration in the growth of repo trading value.
According to the International Capital Market Association (ICMA) European Repo and Collateral Council (ERCC) survey, the outstanding value of repos executed on these platforms increased 15.7 per cent to €1,651.4 billion on 8 December 2022, compared with the previous survey in June 2022.
With rapid growth in the market, industry participants are reviewing the evolving repo space and how technological innovation can be leveraged to support its enhancement.
For Ed Tyndale-Biscoe, product owner for secured funding at ION Group, there has been a “sea change” in the way people view technology and what it is capable of — due, potentially, to the pandemic and the wider need for people to be able to communicate more effectively. Repo, according to Tyndale-Biscoe, has “historically been something of a back office, less of a front-office focus, profit centre-minded business”. He notes that the technology in the repo space has been “undeserving of the business”.
“The hybrid nature of the market is changing. The interdealer markets, which are a fundamental part of how wholesale operations work, the RFQ platforms, which allow other participants to access those markets, the integration complexity to deliver all the necessary decision-making inputs and the cognitive load this implies from the front office point of view have created a complex situation,” says Tyndale-Biscoe.
Managing this setup on a desktop — with several different screens, inventory, pricing, real-time or T+1 margin — is “impossible”, notes Tyndale-Biscoe, unless it is fully integrated and totally standardised, front-to-back.
Addressing the addressable market
Technology is driving a market solution, technology is not leading us to a market solution, says Travis Keltner, global head of repo financing at State Street.
Keltner notes that to identify a solution, it is imperative to adapt to that market and understand the problems and challenges it presents, as well as the opportunities to leverage technology. “As related to repo, it is key to understand the foundational makeup of our current short end as it has changed dramatically over the last few years,” he adds.
Regarding the overarching macro landscape at the short end, Keltner makes reference to the recent headlines highlighting concerns around the “debt ceiling”, suggesting that there are going to be “all types of questions evolving” and a “number of money market considerations” around this.
Also known as the ‘debt limit’, the debt ceiling is the maximum amount of money the US Congress allows the federal government to borrow to cover its bills. As the government edges closer to its debt limit, Congress has yet to decide whether to raise or to suspend the ceiling. Headlines have reported fears that if the ceiling is not raised, then this could cause the US to default on its debt and, potentially, lead to major economic damage.
Once dominated by email, excel sheet and telephone calls, the repo market is now facing a demand for automation, workflow and straight-through processing (STP) from a post-trade perspective. Colleen Stapleton, product manager for match and repo products at MarketAxess, says the catalyst for this shift came from the introduction of the Central Securities Depositories Regulation (CSDR) and the conversations around the looming T+1 settlement cycle — which will come into effect in May 2024 for the US and Canada.
Stapleton indicates that middle-office and operations personnel now understand the need to insert technology, automation and efficiency into their workflows. Although the industry does not appear to be there yet, in terms of standardisation in the repo market, Stapleton is confident that “we are getting there” with the help of industry working groups.
However, at MarketAxess, the firm is finding pain points with booking behaviours around events. Stapleton indicates that certain counterparties have bought into an event workflow, while other counterparties are very focused on a cancel repo workflow. “When you are looking for STP opportunities and bringing communities together,” Stapleton observes, “those kinds of differences lead to bottlenecks.”
Stapleton calls for action in this respect, where the industry, as a community focused on securities finance, looks for additional security and standardisation opportunities, especially around booking, rerates and new prices. “All of this leads to the bottomline, which is the need to continuously build our operational resiliency through STP platforms with solution providers, to help reduce some of the touch that our operational professionals are dealing with today,” she adds.
Time is of the essence for any reporting cycle or settlement cycle, affirms Mark Pekala, vice president of fixed income product management at Broadridge. He continues: “In that regard, it is of the utmost importance to have higher STP rates so that we can bridge the gap between the front, middle and back-office ecosystem, so that they are interoperable, so that everything is in sync with one another.”
For Pekala, interoperability has to be key so that every platform is compatible, he says, so that any solution offered is compatible with another solution. “This way, it really drives the innovative spirit of STP across the board and eliminates bottlenecks, which are of the utmost urgency and importance.”
“The addressable market for repo is underestimated,” says Keltner. Executing repo for market participants is not a simple process, it is not just a trade but also matching, systems integration, settlement and delivery, not to mention margining and reporting. Keltner describes the technology in this space today as “really powerful”, as the entity can be used to expand the addressable market and bring in additional repo participants. However, connecting the right technology vendor and partner with the right user is “not an easy dance”.
While industry participants look to expand the repo market, new entrants are facing barriers to entry from a technology point of view. Tyndale-Biscoe explains that this is due to the difference between the systems involved as well as the complexity of the integration landscape. Furthermore, the budgets required to deploy a complex solution are significant, although these are gradually decreasing, according to Tyndale-Biscoe.
Tyndale-Biscoe indicates that as technology becomes more standardised in the repo segment, vendors will be able to deliver much more “shrink-wrapped” or “out-of-the-box” solutions, which are easier to manage and more cost effective from both the end user and vendor perspective. He concludes: “That is an important aspect of how to grow the size of the market globally and increase the addressable market.”
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