MENA repo markets evolve rapidly
17 September 2024
Industry leaders discuss the rapid rise of repo and securities finance in the Middle East, driven by regulatory support, global integration, and technology advancements
Image: adobe/Dr Ajay Kumar Singh
What are the implications of AI in improving the investment process within capital markets?
Tariq Mattar: Historically, the application of artificial intelligence (AI) in finance has experienced fluctuating levels of enthusiasm. However, recent advancements have driven a substantial increase in its adoption, with nearly half of quantitative investors now leveraging AI in their strategies. These tools are transforming investment processes by uncovering complex market patterns and optimising portfolio management.
Despite its vast potential, AI faces notable challenges within finance, including the low signal-to-noise ratio inherent in financial data, the scarcity of reliable data points, and the constantly shifting nature of the markets.
These factors have somewhat limited broader adoption. Nonetheless, AI is making significant strides in enhancing risk management and generating deeper data insights. The most promising path forward lies in a symbiotic combination of AI and human intelligence, which is anticipated to be the most effective approach for refining investment processes.
What hurdles need to be overcome to set up repo trading (both conventional and Islamic)?
Aysha Al Qaud: One of the primary challenges in setting up repo trading, both conventional and Islamic, lies in the underdeveloped nature of certain markets, particularly for local currency (LCY) bonds and sukuks. In regions such as the GCC, markets tend to be less liquid and less deep, which complicates fair and transparent pricing when compared to more mature financial markets.
For Islamic banks, an additional hurdle is the need to structure repos in a Sharia-compliant manner. This is particularly challenging for non-plain-vanilla repos, where not only must the appropriate Sharia-compliant structure be identified, but the time and effort required for the Sharia boards of both counterparties to approve the transaction adds further complexity.
Operationally, Islamic repos also present higher complexity, often requiring more extensive documentation, particularly for Murabaha-backed repos. The absence of central clearing in Islamic finance and the relative inexperience of some market participants further complicate the process. In addition, Islamic banks operating in jurisdictions where Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) standards apply may face restrictions in trading Islamic repos backed by Murabahas, adding another layer of difficulty to the setup of such transactions.
How do you see the repo and collateral market growing in the GCC?
Al Qaud: The growth of the repo and collateral market in the GCC will likely be driven by several key factors. Collaborations with fintech companies will play an important role in addressing existing gaps and navigating regulation-related challenges, offering innovative solutions that can streamline processes and enhance efficiency.
Support from central banks will be crucial, as their involvement can significantly bolster market confidence, fostering a more secure and robust trading environment. Cross-border integration will also be essential, enabling GCC banks to transact with international institutions. This will require alignment with global standards, the development of central counterparties (CCPs), and a concerted effort to build market expertise, all of which are vital for creating a more mature and interconnected financial ecosystem.
How important are Repos for a treasury department?
Carsten Hiller: Repos are a lifeline for treasury departments, offering a reliable way to secure short-term funding by using high-quality collateral like government bonds. For treasuries, this means they can manage their liquidity needs efficiently without having to sell off their long-term investments. That is where Eurex Repo comes in. As a leading marketplace for secured funding in Europe, Eurex plays a key role by providing an integrated electronic trading and clearing system. This allows treasury departments to easily access liquidity while safely managing their collateral in a standardised and transparent environment.
One of Eurex's standout offerings is its GC Pooling service. This joint product from Eurex and Clearstream has become the go-to solution for treasuries across Europe because it lets them trade with a wide range of counterparties, improving liquidity and optimising the use of collateral, even across borders. It is especially valuable in times of market stress and volatility. GC Pooling is not just about handling day-to-day operations either — it also helps treasury departments meet their regulatory obligations, for example LCR and NSFR management, making it an all-around essential tool.
What makes GC Pooling so effective is its integration of electronic trading, central clearing, and collateral management into one streamlined service. Over 160 institutions, from both the sell side and buy side, are already using it, and since its launch in 2005, it has set the benchmark for efficient cash and collateral management in Europe. Plus, it helps overcome the challenges of fragmented capital markets by offering a consistent and reliable source of repo liquidity, even during financial crises. Because the collateral received can be reused in other money market transactions, Eurex Clearing margining processes, and even in European Central Bank operations, treasury departments have the flexibility they need to manage their liquidity and collateral. Some bank treasury departments have integrated GC Pooling as a source of funding within their treasury policies.
How can central clearing play an important role in the repo/collateral market?
Hiller: Eurex Clearing, functioning as a CCP, enhances transparency in the repo and collateral markets and mitigates risk. This role is particularly crucial during periods of market stress when credit risk and liquidity challenges can escalate. Eurex also makes operations more efficient by allowing for netting across multiple transactions and positions, which reduces overall exposure, lowers margin requirements, and improves capital use. With its GC Pooling service, Eurex enables anonymous trading with a wide range of counterparties, boosting liquidity and optimising collateral use, especially beneficial during turbulent market conditions.
A key part of the Eurex approach is expanding its clearing services to more customer groups, for example buy side clients, which is beneficial for banks because the more trades cleared, the more opportunities for netting exist, allowing them to reduce their balance sheets.
Repo trading makes balance sheet capacity for banks a scarce resource that needs to be managed prudently. Hence banks are heavily incentivised to reduce gross balances by offsetting financial assets (reverse repos) with financial liabilities (repos), also known as ‘balance sheet netting’.
In response, Eurex and Clearstream have improved infrastructure for trading, clearing, and settlement to facilitate balance sheet netting in both, central bank money as well as commercial bank money, offering clients significant capital advantages through multilateral netting.
This solution of balance sheet netting between GC Pooling trades and Special Repo transactions, enhances collateral mobility, improves credit efficiency, and encourages direct participation in cleared repo markets, ultimately helping institutions unlock capital benefits, manage liquidity more effectively, and contribute to a more stable and efficient financial system.
What are new insights for the future in repos and central clearing?
Hiller: Eurex Repo has expanded its existing, successful interbank markets to address buy side clients. In contrast to the anonymous interbank markets, the customised buy side trading licences offer bilateral trading via request for quotes. This allows banks and their buy side clients to continue their existing business relationships.
In Select Finance, which uses the ISA Direct clearing access model, buy side clients can not only make cash investments but also act as cash takers in GC Pooling or sell individual ISINs in the Special Repo segment.
Right now, our Prisma model supports cross-margining for listed and OTC derivatives, but we have not included repo yet. We are planning to roll that out gradually in the nearer future. Once repo is part of the same risk methodology as derivatives, cross-product margining is going to be a big win for our clients.
We are also expanding our services to better support hedge funds. These firms often manage large positions, such as in futures contracts. Combining margin synergies across listed, OTC, and repo markets — rather than treating repo separately — will add significant value for them.
We also made an exciting step forward with the launch of our GC Pooling Green Bond Basket, designed to boost liquidity and efficiency in the European repo market for green collateral. This allows clients to use EUR, USD, GBP, or CHF cash against 80 green bonds from sovereign and supranational issuers across seven EEA countries. It is part of Eurex's broader ESG initiative, supporting a robust eco-system for green bonds.
On the technology side, Eurex is exploring blockchain and distributed ledger technology to improve repo trading. These innovations could make settlement processes smoother, lower operational risk, and offer real-time transparency in transactions.
In short, Eurex is in a strong position to stay ahead in the evolving repo and collateral markets. With its innovative trading and clearing solutions and commitment to transparency, risk reduction, and tech advancement, Eurex is set to keep playing a key role in maintaining a stable and efficient repo market.
What initiatives are you seeing in the Middle East financial markets?
Ricky Maloney: The Middle East financial markets are experiencing a period of accelerated growth, driven by key initiatives focused on the development of market infrastructure and capital markets. Central clearing remains a priority across the region, with several countries in the process of introducing enhanced securities and derivatives clearing services. This focus on clearing is underpinned by broader technological upgrades, aimed at modernising capital markets. These upgrades are enabling the digitisation of services, fostering innovation, and unlocking value-added services that strengthen market operations.
Another significant trend is the region’s increasing integration with international markets, particularly through the establishment of links with international central securities depositories (ICSDs). These connections are enhancing cross-border market access and liquidity. Additionally, there has been a notable emphasis on the growth of securities lending and repo markets, with multiple initiatives underway to support their development. Together, these efforts are contributing to a more sophisticated and interconnected financial ecosystem in the Middle East.
What important themes are you seeing around repos in the Middle East?
Maloney: In the Middle East, several important themes are shaping the repo markets. A key focus has been the active support from central banks, governments, and regulators to ensure that robust legal and regulatory frameworks are in place, providing a solid foundation for the market’s growth. This institutional backing is being complemented by efforts to integrate with ICSDs, facilitating stronger connections with global markets and improving access to cross-border liquidity.
The adoption of global standard documentation is also gaining traction, fostering a more level playing field and enhancing operational consistency. Additionally, educational initiatives aimed at investors are playing a crucial role, helping market participants better understand and utilise the growing range of repo services. Finally, technological development remains a vital theme, with advancements aimed at enhancing the efficiency and accessibility of repo markets across the region. Together, these initiatives are driving the evolution of a more sophisticated and internationally aligned repo market in the Middle East.
Can you give us an overview of some of the key Shari’ah-compliant Repo documentation?
Ijlal Ahmed Alvi: Repo has played an important role in the development of the conventional financial market and such a product is also required for further development of the Islamic financial market. Certain regulators such as Malaysia, Bahrain, Indonesia and Saudi Arabia have introduced Shari’ah-compliant repo alternatives in their domestic markets.
In 2010, IIFM carried out an industry consultation exercise and published a Reference Paper on ‘Islamic Alternative to Repo’. As per the market recommendations, IIFM published the Master Collateralized Murabahah Agreement (MCMA) as a Shari’ah-compliant alternative to repo documentation based on ‘Rahn’ or ‘Pledge’ principle in 2014. The MCMA is widely used by the market and meets the liquidity management requirement of Islamic financial institutions by utilising their Sukuk portfolio to create liquidity.
The Islamic finance industry continues to explore additional Shari’ah-compliant liquidity management tools which could be economically better with enhanced capital preservation features to assist the Islamic financial market’s development and progression.
IIFM is aiming to develop a globally standardised Shari’ah-compliant repo style Master Agreement based on a sell/buy product structure in consultation with the industry in order to enhance liquidity management products for Islamic financial institutions.
What are the difficulties faced with Islamic repos compared to conventional ones?
Peter Cullen: There are two main documentary frameworks for Islamic repos. The first is the ‘Double Wa'ad’ structure. This is a simple title transfer structure prevalent in Saudi Arabia that is very closely based on, and commercially equivalent to, an ordinary Global Master Repurchase Agreement (GMRA). The second is a collateralised Murabaha financing, where commodities are traded in order to generate clean debt obligations, or in the case of floating rate payments or termination payments, spot payment obligations. Historically, the collateral for Murabaha repos was generally provided by way of security (see the International Islamic Financial Market standard form documents), but increasingly Murabaha repos are now collateralised on a title transfer basis.
Both of these title transfer structures, if drafted carefully, can closely mirror the commercial and legal effect of an ordinary GMRA. In jurisdictions such as Bahrain which have implemented a modern netting law, it is possible to obtain clean netting and collateral opinions for Islamic repos. This means that once a repo provider has gone through the process of setting up and understanding the documentary structure and associated commodity trading arrangements, they have access to a tool that allows them to provide repos to Islamic clients without material documentary risk (for the repo provider) relative to an ordinary GMRA.
"We have enjoyed working with both Islamic repo providers and their customers who are confident enough to push the frontiers of traditional market norms to achieve ambitious objectives."
Even the (documentarily heavier) Murabaha-based format is flexible enough to be used in the context of complex structured arrangements (for example, where there is interaction with repackaging structures). This is because spot commodity transactions allow the generation of essentially any commercially-desired payment obligations, that are collateralised by title transfer collateral under a document similar in commercial effect to an International Swaps and Derivatives Association (ISDA) credit support annex (CSA). We have enjoyed working with both Islamic repo providers and their customers who are confident enough to push the frontiers of traditional market norms to achieve ambitious objectives.
Tariq Mattar: Historically, the application of artificial intelligence (AI) in finance has experienced fluctuating levels of enthusiasm. However, recent advancements have driven a substantial increase in its adoption, with nearly half of quantitative investors now leveraging AI in their strategies. These tools are transforming investment processes by uncovering complex market patterns and optimising portfolio management.
Despite its vast potential, AI faces notable challenges within finance, including the low signal-to-noise ratio inherent in financial data, the scarcity of reliable data points, and the constantly shifting nature of the markets.
These factors have somewhat limited broader adoption. Nonetheless, AI is making significant strides in enhancing risk management and generating deeper data insights. The most promising path forward lies in a symbiotic combination of AI and human intelligence, which is anticipated to be the most effective approach for refining investment processes.
What hurdles need to be overcome to set up repo trading (both conventional and Islamic)?
Aysha Al Qaud: One of the primary challenges in setting up repo trading, both conventional and Islamic, lies in the underdeveloped nature of certain markets, particularly for local currency (LCY) bonds and sukuks. In regions such as the GCC, markets tend to be less liquid and less deep, which complicates fair and transparent pricing when compared to more mature financial markets.
For Islamic banks, an additional hurdle is the need to structure repos in a Sharia-compliant manner. This is particularly challenging for non-plain-vanilla repos, where not only must the appropriate Sharia-compliant structure be identified, but the time and effort required for the Sharia boards of both counterparties to approve the transaction adds further complexity.
Operationally, Islamic repos also present higher complexity, often requiring more extensive documentation, particularly for Murabaha-backed repos. The absence of central clearing in Islamic finance and the relative inexperience of some market participants further complicate the process. In addition, Islamic banks operating in jurisdictions where Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) standards apply may face restrictions in trading Islamic repos backed by Murabahas, adding another layer of difficulty to the setup of such transactions.
How do you see the repo and collateral market growing in the GCC?
Al Qaud: The growth of the repo and collateral market in the GCC will likely be driven by several key factors. Collaborations with fintech companies will play an important role in addressing existing gaps and navigating regulation-related challenges, offering innovative solutions that can streamline processes and enhance efficiency.
Support from central banks will be crucial, as their involvement can significantly bolster market confidence, fostering a more secure and robust trading environment. Cross-border integration will also be essential, enabling GCC banks to transact with international institutions. This will require alignment with global standards, the development of central counterparties (CCPs), and a concerted effort to build market expertise, all of which are vital for creating a more mature and interconnected financial ecosystem.
How important are Repos for a treasury department?
Carsten Hiller: Repos are a lifeline for treasury departments, offering a reliable way to secure short-term funding by using high-quality collateral like government bonds. For treasuries, this means they can manage their liquidity needs efficiently without having to sell off their long-term investments. That is where Eurex Repo comes in. As a leading marketplace for secured funding in Europe, Eurex plays a key role by providing an integrated electronic trading and clearing system. This allows treasury departments to easily access liquidity while safely managing their collateral in a standardised and transparent environment.
One of Eurex's standout offerings is its GC Pooling service. This joint product from Eurex and Clearstream has become the go-to solution for treasuries across Europe because it lets them trade with a wide range of counterparties, improving liquidity and optimising the use of collateral, even across borders. It is especially valuable in times of market stress and volatility. GC Pooling is not just about handling day-to-day operations either — it also helps treasury departments meet their regulatory obligations, for example LCR and NSFR management, making it an all-around essential tool.
What makes GC Pooling so effective is its integration of electronic trading, central clearing, and collateral management into one streamlined service. Over 160 institutions, from both the sell side and buy side, are already using it, and since its launch in 2005, it has set the benchmark for efficient cash and collateral management in Europe. Plus, it helps overcome the challenges of fragmented capital markets by offering a consistent and reliable source of repo liquidity, even during financial crises. Because the collateral received can be reused in other money market transactions, Eurex Clearing margining processes, and even in European Central Bank operations, treasury departments have the flexibility they need to manage their liquidity and collateral. Some bank treasury departments have integrated GC Pooling as a source of funding within their treasury policies.
How can central clearing play an important role in the repo/collateral market?
Hiller: Eurex Clearing, functioning as a CCP, enhances transparency in the repo and collateral markets and mitigates risk. This role is particularly crucial during periods of market stress when credit risk and liquidity challenges can escalate. Eurex also makes operations more efficient by allowing for netting across multiple transactions and positions, which reduces overall exposure, lowers margin requirements, and improves capital use. With its GC Pooling service, Eurex enables anonymous trading with a wide range of counterparties, boosting liquidity and optimising collateral use, especially beneficial during turbulent market conditions.
A key part of the Eurex approach is expanding its clearing services to more customer groups, for example buy side clients, which is beneficial for banks because the more trades cleared, the more opportunities for netting exist, allowing them to reduce their balance sheets.
Repo trading makes balance sheet capacity for banks a scarce resource that needs to be managed prudently. Hence banks are heavily incentivised to reduce gross balances by offsetting financial assets (reverse repos) with financial liabilities (repos), also known as ‘balance sheet netting’.
In response, Eurex and Clearstream have improved infrastructure for trading, clearing, and settlement to facilitate balance sheet netting in both, central bank money as well as commercial bank money, offering clients significant capital advantages through multilateral netting.
This solution of balance sheet netting between GC Pooling trades and Special Repo transactions, enhances collateral mobility, improves credit efficiency, and encourages direct participation in cleared repo markets, ultimately helping institutions unlock capital benefits, manage liquidity more effectively, and contribute to a more stable and efficient financial system.
What are new insights for the future in repos and central clearing?
Hiller: Eurex Repo has expanded its existing, successful interbank markets to address buy side clients. In contrast to the anonymous interbank markets, the customised buy side trading licences offer bilateral trading via request for quotes. This allows banks and their buy side clients to continue their existing business relationships.
In Select Finance, which uses the ISA Direct clearing access model, buy side clients can not only make cash investments but also act as cash takers in GC Pooling or sell individual ISINs in the Special Repo segment.
Right now, our Prisma model supports cross-margining for listed and OTC derivatives, but we have not included repo yet. We are planning to roll that out gradually in the nearer future. Once repo is part of the same risk methodology as derivatives, cross-product margining is going to be a big win for our clients.
We are also expanding our services to better support hedge funds. These firms often manage large positions, such as in futures contracts. Combining margin synergies across listed, OTC, and repo markets — rather than treating repo separately — will add significant value for them.
We also made an exciting step forward with the launch of our GC Pooling Green Bond Basket, designed to boost liquidity and efficiency in the European repo market for green collateral. This allows clients to use EUR, USD, GBP, or CHF cash against 80 green bonds from sovereign and supranational issuers across seven EEA countries. It is part of Eurex's broader ESG initiative, supporting a robust eco-system for green bonds.
On the technology side, Eurex is exploring blockchain and distributed ledger technology to improve repo trading. These innovations could make settlement processes smoother, lower operational risk, and offer real-time transparency in transactions.
In short, Eurex is in a strong position to stay ahead in the evolving repo and collateral markets. With its innovative trading and clearing solutions and commitment to transparency, risk reduction, and tech advancement, Eurex is set to keep playing a key role in maintaining a stable and efficient repo market.
What initiatives are you seeing in the Middle East financial markets?
Ricky Maloney: The Middle East financial markets are experiencing a period of accelerated growth, driven by key initiatives focused on the development of market infrastructure and capital markets. Central clearing remains a priority across the region, with several countries in the process of introducing enhanced securities and derivatives clearing services. This focus on clearing is underpinned by broader technological upgrades, aimed at modernising capital markets. These upgrades are enabling the digitisation of services, fostering innovation, and unlocking value-added services that strengthen market operations.
Another significant trend is the region’s increasing integration with international markets, particularly through the establishment of links with international central securities depositories (ICSDs). These connections are enhancing cross-border market access and liquidity. Additionally, there has been a notable emphasis on the growth of securities lending and repo markets, with multiple initiatives underway to support their development. Together, these efforts are contributing to a more sophisticated and interconnected financial ecosystem in the Middle East.
What important themes are you seeing around repos in the Middle East?
Maloney: In the Middle East, several important themes are shaping the repo markets. A key focus has been the active support from central banks, governments, and regulators to ensure that robust legal and regulatory frameworks are in place, providing a solid foundation for the market’s growth. This institutional backing is being complemented by efforts to integrate with ICSDs, facilitating stronger connections with global markets and improving access to cross-border liquidity.
The adoption of global standard documentation is also gaining traction, fostering a more level playing field and enhancing operational consistency. Additionally, educational initiatives aimed at investors are playing a crucial role, helping market participants better understand and utilise the growing range of repo services. Finally, technological development remains a vital theme, with advancements aimed at enhancing the efficiency and accessibility of repo markets across the region. Together, these initiatives are driving the evolution of a more sophisticated and internationally aligned repo market in the Middle East.
Can you give us an overview of some of the key Shari’ah-compliant Repo documentation?
Ijlal Ahmed Alvi: Repo has played an important role in the development of the conventional financial market and such a product is also required for further development of the Islamic financial market. Certain regulators such as Malaysia, Bahrain, Indonesia and Saudi Arabia have introduced Shari’ah-compliant repo alternatives in their domestic markets.
In 2010, IIFM carried out an industry consultation exercise and published a Reference Paper on ‘Islamic Alternative to Repo’. As per the market recommendations, IIFM published the Master Collateralized Murabahah Agreement (MCMA) as a Shari’ah-compliant alternative to repo documentation based on ‘Rahn’ or ‘Pledge’ principle in 2014. The MCMA is widely used by the market and meets the liquidity management requirement of Islamic financial institutions by utilising their Sukuk portfolio to create liquidity.
The Islamic finance industry continues to explore additional Shari’ah-compliant liquidity management tools which could be economically better with enhanced capital preservation features to assist the Islamic financial market’s development and progression.
IIFM is aiming to develop a globally standardised Shari’ah-compliant repo style Master Agreement based on a sell/buy product structure in consultation with the industry in order to enhance liquidity management products for Islamic financial institutions.
What are the difficulties faced with Islamic repos compared to conventional ones?
Peter Cullen: There are two main documentary frameworks for Islamic repos. The first is the ‘Double Wa'ad’ structure. This is a simple title transfer structure prevalent in Saudi Arabia that is very closely based on, and commercially equivalent to, an ordinary Global Master Repurchase Agreement (GMRA). The second is a collateralised Murabaha financing, where commodities are traded in order to generate clean debt obligations, or in the case of floating rate payments or termination payments, spot payment obligations. Historically, the collateral for Murabaha repos was generally provided by way of security (see the International Islamic Financial Market standard form documents), but increasingly Murabaha repos are now collateralised on a title transfer basis.
Both of these title transfer structures, if drafted carefully, can closely mirror the commercial and legal effect of an ordinary GMRA. In jurisdictions such as Bahrain which have implemented a modern netting law, it is possible to obtain clean netting and collateral opinions for Islamic repos. This means that once a repo provider has gone through the process of setting up and understanding the documentary structure and associated commodity trading arrangements, they have access to a tool that allows them to provide repos to Islamic clients without material documentary risk (for the repo provider) relative to an ordinary GMRA.
"We have enjoyed working with both Islamic repo providers and their customers who are confident enough to push the frontiers of traditional market norms to achieve ambitious objectives."
Even the (documentarily heavier) Murabaha-based format is flexible enough to be used in the context of complex structured arrangements (for example, where there is interaction with repackaging structures). This is because spot commodity transactions allow the generation of essentially any commercially-desired payment obligations, that are collateralised by title transfer collateral under a document similar in commercial effect to an International Swaps and Derivatives Association (ISDA) credit support annex (CSA). We have enjoyed working with both Islamic repo providers and their customers who are confident enough to push the frontiers of traditional market norms to achieve ambitious objectives.
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