At a glance
- The final SEC ruling on mandatory clearing will cause a shake-up in the repo market
- The market has been slow to automate, but is now moving to adapt
- The Common Domain Model (CDM) holds promise for standardisation
Compared with equities, sovereign bonds and even corporate bonds, the repo market has been slow to adopt new technologies and adapt to new ways of working. But where it was once dominated by phone calls, spreadsheets and email, the market is now facing a demand for automation, while new US rules on mandatory clearing will shake up the way the market operates.
The US Securities and Exchange Commission (SEC) issued on December 13 new landmark regulations which include specific requirements for repo and reverse repo collateralised by US Treasury securities to be cleared centrally. Under the new rule, market participants will need to stump up collateral to back their positions, with central clearing agencies holding it separately.
The new rules come into effect from March 2025 for clearing houses that will have to meet beefed up standards on risk management, access to settlement services and protection of customer assets. The rules for members of clearing houses to clear cash transactions will come into effect during December 2025 and for repo transactions during June 2026.
“Yesterday was the most significant day for US Treasury market structure in decades. The SEC’s final rule will re-assemble the way that the Treasury market functions by requiring market participants to clear all repo and interdealer cash trades,” says Nate Wuerffel, head of market structure at BNY Mellon.
Camille McKelvey, head of post-trade business development at MarketAxess, says that there could be the potential for some players to be pushed out of the market, akin to what happened in the derivatives market.
Repurchase transactions, otherwise known as “repo”, provide short-term funding where sellers offer fixed-income securities — commonly government bonds — to another party at an agreed price, but at the same time committing to repurchasing the same asset at a higher price in the future.
For investment banks, the repo market is an efficient source of short-term funding. It is also a market that is growing — 11.5% year-on-year. In Europe, according to the latest European Repo and Collateral Council survey, the total value of repo contracts on the books of surveyed institutions was a record €10,794bn.
Despite being a lynchpin of capital markets and a source of high-quality, short-term liquidity, repo has lagged behind other market segments in its adoption of digitalisation and process automation.
According to Ms McKelvey, the move to automation has been slow, but it is now happening and the market is having to adapt.
Ripe for change
One of the key ways it is evolving is through the use of automated request for quote (RFQ) protocols. Traditionally, repo is a heavily intermediated product whereby buyers contact individual dealers for quotes. With automated RFQs, potential buyers get quotes via an electronic platform and can get a fast and broader comparison view.
“If you are a client and you are looking to fund some bonds or invest some cash, you basically would have to call your dealer or send them a Bloomberg message and ask them for a quote. The automated RFQ is essentially systematising that. It’s a far more efficient way of doing it,” says Andy Hill, senior director at the International Capital Market Association (ICMA).
And where efficiencies are gained, money stands to be saved. Peter Whitaker, market structure strategist at Jane Street, a quantitative trading firm and liquidity provider, pointed to some recent research released by Barclays that proposed electronic trades — not limited to repo — could cut the per trade transaction cost by between 20% and 40%.
“Investors are ultimately saving money and the driver of that is these platforms promote competition; it’s not someone on the phone calling up 10 people, giving up and thinking this is all too tiring — what we’re seeing is that it’s very systematised, it’s very automated, you can ask many people for a price and trade at the best price,” he said.
For repo specifically, Ms McKelvey sees the adoption of pre-trade automated RFQs as a step in the right direction, but she highlights the need to sort out issues in the post-trade process.
“There are trillions of dollars traded every day in this market, and frankly we’re still hearing about faxes being sent and paper confirmations — and although the world is changing and we’re moving to digitalisation, this is the reality,” she says. The key reasons, she believes, stem from the repo market being very “relationship driven”. She highlights that while the importance of relationships should not be undermined by technology, sometimes it can potentially stifle innovation.
But the reliance on relationships is not the whole story. “Part of the problem with repo is that it is not heavily standardised. You have different collateral, different dates, which can make it all a bit complicated. Also, whenever the balance sheet gets scarce, it becomes a lot more difficult to trade on a platform, particularly repo — when things get volatile, you hit the phones. It’s about leveraging those relationships,” says Mr Hill.
The adoption of the Common Domain Model (CDM) — a data standardisation model, which now extends to repo — could potentially fix this. “Repo market participants can now use the production version of the CDM to help automate a broad range of repo trading and post-trade processes, reducing the operational burden and freeing up resources to automate manual tasks and prepare for potential industry innovations such as the shortening of the settlement cycles and the emergence of digital bonds,” says Gabriel Callsen, director of fintech and digitalisation at ICMA.
For Ms McKelvey, all this amounts to a market that is ripe for change. “The time for innovation in repo and collateral capital markets is now.”
