“If the repo market does not work, none of it works,” said International Capital Market Association (ICMA) senior director Andy Hill, when discussing repo as a cornerstone of the financial system at Securities Finance Times’ winter Securities Finance Technology Symposium.
Hill made the comment on the Symposium’s Repo Panel which outlined how the industry can make the market more resilient, beyond regulatory intervention.
The discussion was spearheaded by BondCliq’s head of European Expansion Gabriele Frediani, who moderated the timely Repo panel, which took place amid the backdrop of wider industry concerns surrounding the repo market.
The panel consisted of EMEA head of financing solutions business development at State Street Cassandra Jones, EMEA director of sales at GLMX Andy Turvey, and head of business development straight-through processing (STP) at MarketAxess Camille McKelvey.
Providing an overview of the repo landscape, ICMA’s Hill said: “Repo is a bank-intermediated product, repo trades through the balance sheets of banks.
“It is important that banks are able to trade their match books, to take positions onto their balance sheet and provide two-way liquidity in repo across all different bond classes. This is becoming more difficult.”
The panel raised concern over Basel regulation, alluding that its regulation has made it increasingly expensive for the industry to apply balance sheet, particularly for repo, which is a relatively high volume, low return transaction.
According to ICMA’s Hill, the industry has seen banks improve balance sheet management over time and has witnessed a move to increased clearing. However, the industry is still having moments of vulnerability.
He added: “We hear concern from money market funds that are being penalised for being long cash for certain times in the year.
“We hear concerns from pension funds that worry about being able to meet margin calls, because they have to ‘repo out’ their holdings to raise cash. The repo market is crucially important and prone to vulnerabilities.”
To aid the repo market in dealing with such vulnerabilities, the panel discussed the push toward incorporating automation.
MarketAxess’ McKelvey explained: “When it comes to the repo market and the adoption of automation, it has been very slow, and we still have a fairly long way to go. However, in the last two to three years, there has been a real shift and a focus on repo automation and repo workflow from front to back.
“We are starting to see more and more buy-side firms coming onto the post-trade repo platform at MarketAxess. These clients have been instrumental in this growth by working with their sell-side counterparts to move to post-trade automation.”
Market participants expressed the need for change in the repo markets. One panellist said that if regulation does not change, it is imperative that the repo market see a continued innovation to help give clients and banks optionality to be able to “pull different levers to deal with the regulatory reporting times”.
Whether it be incorporating more peer-to-peer structures, or re-evaluating securities lending and the cost of indemnification, change is needed to allow banks and dealers to provide a more efficient way of offering liquidity, the panellist concluded.
