State Street’s Travis Keltner tells Bob Currie that this P2P service allows buy-side firms to access new pools of liquidity, while targeting STP flows throughout the trade lifecycle from electronic transaction negotiation to collateral management
State Street has confirmed the execution of the first transactions through its peer-to-peer repo programme, following the launch of this initiative in March 2021.
This programme facilitates overnight and term repurchase agreement transactions between buy-side firms, with State Street providing a guarantee for all repo trades that meet programme requirements.
This offers protection for repo buyers in the peer-to-peer programme against default of the peer repo seller.
State Street’s peer-to-peer programme aims to extend buy-side access to liquidity and secured investment opportunities, offering scale and flexibility, while complementing existing options available to buy-side firms through other channels.
This peer-to-peer network is founded on a legal framework that allows each programme participant to stand as either repo buyer or repo seller under the programme Master Repurchase Agreement (MRA), which defines the terms under which repo participants trade bilaterally with each other.
Speaking to SFT, State Street’s managing director, funding and collateral solutions, Travis Keltner says that a major focus of the development work in bringing this P2P solution to launch has been in structuring the programme agreement. “Each participant signs a single document, which establishes the legal framework that enables each programme participant to act as repo buyer and/or seller under a programme MRA and that defines the terms of the indemnification extended by State Street as programme sponsor,” he says.
There has been extensive work since March in gathering feedback from clients and aligning the needs of repo buyer and repo seller. “A key step in this process included reviewing our programme agreement with S&P Global Ratings, which affirmed that State Street’s guaranty terms are consistent with its principles for credit substitution of an unrated counterparty,” he adds.
With these contractual elements being finalised during Q3, State Street has subsequently been in a position to onboard its first clients. Its first live trades, between a large beneficial owner and a non-traditional investment manager, were completed last week.
The P2P repo programme has now launched out of the US and the Cayman Islands, supporting trading against US Treasuries, agency securities and corporate bonds as collateral. Moving into 2022, the timeline involves rolling out the service into selected jurisdictions in EMEA and the Asia Pacific — with priority given to where demand is strongest from clients. “Our preparatory work is currently focused on identifying how contractual terms will need to be amended to meet local law requirements relating to repurchase agreements in those markets,” says Keltner.
Given that the repo trading requirements of buy-side clients may vary substantially, SFT asked Keltner how challenging it was to standardise terms in the P2P contract while still offering the trading flexibility that clients require from the platform. “That is a fundamental question,” he responds, “and the challenge revolves around how much flexibility we should provide. Our programme is built around establishing minimum criteria in the legal agreement — not a single set of rigid criteria — and the participant has considerable flexibility in how it trades, providing that these minimum criteria are fulfilled.”
This flexibility also crucially extends into the clearing, settlement and collateral management environment. The goal as a custodian and securities finance specialist, Keltner says, is not to lock up clients’ assets — but, on the contrary, to help participants to mobilise and allocate collateral and liquidity as efficiently as possible. “The platform will enable us to bring pools together — currently out of the US and Cayman, but subsequently into EMEA and APAC as we extend the service into those regions.”
Programme development
In developing this P2P service, the project team is focused on establishing end-to-end STP flows – from electronic transaction negotiation screens to collateral management throughout the trade lifecycle – and is working closely with State Street’s internal Collateral+ team, its financing analytics group and with a fintech partner to drive its advance.
“Participants can trade efficiently in a DvP environment using current arrangements, but our planned enhancements in the coming months will improve the efficiency and flexibility of trade flow,” explains Keltner. “We will also extend a range of pre-trade and post-trade analytics.”
SFT asked State Street how this P2P platform will fit alongside existing channels that buy-side clients employ to meet their financing requirements. Will this P2P service displace secured financing relationships with the dealer community? Responding to this question, Keltner says that many observers have overplayed the “either-or” choice between a P2P and a dealer-led solution. State Street views these options as complementary, with its P2P service offering opportunity to access new, incremental pools of liquidity and to diversify liquidity access. Importantly, this will enable repo trading against both traditional and alternative collateral assets.
Shedding more light on this issue, State Street’s head of global markets funding and collateral Gino Timperio says: “The buy-side continues to seek greater control and optimisation of their trading opportunities and we are strategically committed to supporting the buy-side community.”
“The market volatility that we witnessed during the spring of 2020 and the greater than US$1 trillion enrolled in the Federal Reserve’s Reverse Repo Program only confirm the critical need for more sources of liquidity and secured investment opportunities remain in high demand,” adds Timperio. “We continue to prioritise our clients’ access to a broader range of trading counterparties, with peer-to-peer repo complementing our longstanding sponsored repo offering via the Fixed Income Clearing Corporation.”
Leslie Womack, State Street’s head of product development for global markets funding and collateral, adds: “A key factor to structuring the product offering is the constructive input we received from a diverse group of clients on our programme agreements, as well as from S&P Global Ratings, which affirmed that the agreements are consistent with State Street’s guaranty, which meets its principles for credit substitution such that the credit quality of an agreement with an unrated counterparty would be based on the credit rating of State Street as guarantor.”
