Repo and Collateral Markets
Repo and Collateral Markets by Andy Hill, Alexander Westphal, Zhan Chen and Lisa Cleary
ICMA ERCC buy-side workshop On 9 February 2022, the ICMA European Repo and Collateral Council (ERCC) held a workshop that brought together a range of buy-side participants in the European repo market. The aim of the workshop was to identify the various challenges that different types of buy-side institutions face. This would set the scene for a potential second workshop which would be intended to include representatives of other market stakeholders and to broaden the discussion to the challenges facing liquidity providers, as well as potential solutions.
But the ultimate barrier, and of biggest concern to buy sides, is the uncertainty of liquidity provision from banks, particularly over key reporting dates, such as quarter and year-ends, or during episodes of extreme market volatility or stress, as experienced in early 2020. This has led to behavioural changes in how buy sides manage their liquidity risk, including, in some cases, the use of committed repo facilities.
The workshop was structured around three key topics: (i) the role and importance of the repo market for buy sides; (ii) challenges in accessing the repo market; and (iii) and improving access to the repo market.
The participants discussed a number of potential solutions to help facilitate wider access to liquidity, including e-trading, sponsored clearing, peer-to-peer models, and alternatives such as total return swaps (TRS). However, the overarching view was that the smooth and effective functioning of the repo market is ultimately reliant on the ability and appetite of banks to provide intermediation, and, in the European context at least, this remains a potential vulnerability.
Buy-side perspectives
Next steps
Buy sides use the repo market for a range of different purposes and to support a variety of different investment strategies. Depending on the type of investment firm, or the underlying investment strategy, this includes: sourcing leverage; managing liquidity; covering shorts for relative value trades; margin maintenance for derivatives transactions; portfolio yield enhancement; collateral optimisation; and portfolio duration gap management. Transaction types can be in a range of collateral types and currencies, executed bilaterally or through triparty, ranging from very short to very long maturities, and vanilla or structured, or even synthetic in nature.
The ERCC will look to hold a follow-up workshop in the near future, most likely bringing sell sides into the discussion. There also seems to be a desire among the ERCC buyside membership to broaden its engagement through the ERCC more generally. Meanwhile, ICMA intends to use the workshops to inform a white paper that can be used as a platform to raise regulatory awareness around some of the dynamics and challenges affecting buy-side access to the European repo market.
Barriers to accessing the market for buy sides can come from a variety of sources. These can relate to the onboarding process with dealers, including the negotiation and signing of GMRAs, which can be time-consuming and resource-intensive. Similarly, providing for straight-through-processing of transactions (STP) and the connecting of order and execution management systems (OMS/EMS) to trading venues can entail a significant investment in technology builds. While it can make sense to dedicate such resources and investment for banks, where repo desks are usually a major revenue generator, it may be more difficult to justify from the perspective of many buy sides.
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Contact: Andy Hill and Alexander Westphal andy.hill@icmagroup.org alexander.westphal@icmagroup.org
ICMA ERCC discussion paper on settlement efficiency On 1 February 2022, the day of the “go-live” of CSDR cash penalties, the ERCC released its discussion paper, Optimising Settlement Efficiency. The paper aims to focus attention on key opportunities to strengthen settlement efficiency in Europe, which are seen as complementary to the CSDR measures. It consists of two main parts. The first
