The “Cash is King” colloquialism may be due for an update. “Securities and Cash are King and Queen” is more accurate in today’s world. Securities move back and forth between counterparties to fulfil delivery obligations, to meet margin calls and to raise cash. Cash movement is driven by the search for risk-adjusted returns and by a need to finance operations.
The “Cash is King” colloquialism may be due for an update. “Securities and Cash are King and Queen” is more accurate in today’s world. Securities move back and forth between counterparties to fulfil delivery obligations, to meet margin calls and to raise cash. Cash movement is driven by the search for risk-adjusted returns and by a need to finance operations.
Irrespective of the reasons driving any individual transaction, firms now look across both cash and securities in search of their joint optimal mix. As market structure, regulation and technology make securities and cash increasingly interchangeable, demand for technologies which facilitate the day-to-day convergence of their liquidity pools grows as well.
Asset optimisation, or collateral optimisation if viewed through a securities finance lens, is an essential practice at most financial institutions as the cost of managing exposures in short-term markets becomes more expensive as interest rates rise. Regulation — such as the Securities Financing Transactions Regulation (SFTR), Uncleared Margin Rules (UMR), Central Securities Depositories Regulation (CSDR), Rule 204, SEC 10c-1 and T+1 settlement, to name a few examples — adds to the cost and pushes up capital and reporting requirements. To cope with these increased costs, firms are actively leveraging technology to optimise their asset and cash utilisation.
Regulated banks bear the brunt of many of these costs, forcing them to limit the balance sheet they provide to clients. Their client approach may be to prioritise those that are strategically important to the firm and then to ration the remaining balance sheet across other clients whose importance is limited to opportunities for the funding desk. To create more capacity for their clients, firms have turned to capital efficient financing vehicles. These alternative transactions create balance sheet netting opportunities for the sell side or are off-balance sheet at the outset of the transaction.
Balance sheet-neutral and off-balance sheet transactions occur in a variety of ways. Sometimes securities that have special intrinsic value are exchanged for, or netted against, similar securities that are deemed general collateral. In repo, these are called “package trades” and in securities lending these are known as “non-cash collateral” transactions.
Netting is also becoming increasingly popular through central clearing counterparty (CCP) activity. When trading with a direct member of a CCP or with a sponsored member, sell-side firms have the opportunity to net down the trade by engaging the CCP with an offsetting transaction. Other forms of off-balance sheet funding include synthetic or derivative financing, often via Total Return Swaps, which is a growing market sector due to the need for dealers to service their clients in a capital-friendly manner.
To have continuous access to liquidity, around bank reporting dates in particular, the buy side — whether beneficial owners are doing their own financing or agent lenders and prime brokers are engaging the markets on their behalf — has become adept at supporting these workflows.
Securities lenders and prime brokers are becoming increasingly skilled at tailoring financing solutions to their clients’ specific needs. By taking an in-depth look at individual investment preferences and matching those against sell side limitations, cost-efficient financing is more likely to be achieved — whether through traditional bilateral, cleared or derivative transactions.
The search for solutions across multiple financing alternatives dramatically increases the value of access to liquidity across previously siloed instruments. In today’s funding markets, this is a dynamic process as we are in the midst of a secular shift in the securities finance markets as technology becomes a primary liquidity-sourcing tool. An unsurprising outgrowth of the use of technology to source liquidity is what might be called “internalisation” — that is, extending the search for liquidity inside individual organisations and, where possible, matching longs and shorts — to cost optimise while reducing reliance on open market liquidity pools.
Simultaneously, cash investors are facing issues similar to those of collateral managers. As inflation has spiked around the world, central banks have raised short-term rates by hundreds of basis points, while markets are still flush with cash generated by years of quantitative easing. A clear reflection of this is the US$2.7 trillion in money market mutual fund balances parked with the Federal Reserve’s reverse repo facility (RRP) programme as investors have moved record amounts of cash from low-yielding bank deposits to higher-yielding money market funds.
As the remnants of quantitative easing clear, investors in front-end markets will increasingly revert to diversified cash management strategies and the attendant need to deploy their cash across many instruments. Short term government and agency debt, time deposits, commercial paper and repo represent the largest money fund investment destinations. Despite their popularity and adjacency, finding the best yields across these instruments can be extremely challenging. In retrospect, these investment instrument ‘close cousins’ have evolved into remarkably fragmented sub-ecosystems. The difficulty of finding the best rates is exceeded only by the challenges of booking and allocating those transactions.
Perhaps the greatest challenges emanating from the complex and fragmented world of collateral and cash management accrue to agent securities lenders, who engage the markets every day to manage collateral and to reinvest proceeds of their collateral lending activities. For agent securities lenders and money market mutual funds, there is an immediate need to unify access across the numerous short-term markets in which they trade.
All individual markets, to some extent, are built off the legacy of previous technology constraints. Given these constraints, it is quite difficult for practitioners to unilaterally and organically harmonise liquidity access across markets.
To address this challenge, GLMX is extending its established reach within the repo market to include securities lending, time deposits, and, by the end of the year, certificates of deposit and derivatives. Through a single GLMX interface, clients can engage across their target markets with greatly enhanced efficiency.
Despite the recent focus — after decades of neglect — on fixed income market technology, the industry remains dependent on numerous manual processes and spreadsheet hacks.
Participants in the money market ecosystem include bank and non-bank repo desks, principal and agent lenders, prime brokers, hedge funds, pensions funds, insurance companies, sovereign wealth funds, central banks, state agencies, futures commission merchants, money market funds, bank treasurers, corporate treasurers and securities lending reinvestment desks.
This otherwise sophisticated group is executing trades worth tens of trillions of dollars every day using antiquated technology, which ultimately increases costs to all involved. GLMX offers a path to unifying this fragmented landscape.
