Considerations on securities finance market evolution (Premium Content)

We’ve had some thoughts this week about how securities finance markets are developing, including the prospects of more electronic trading and how to read available data. Here’s what we are seeing.

Tradition’s DBV-X market. Is Tradition’s new electronic market for funding and collateral the real deal? Could this be a game changer? It certainly fits into a thesis we’ve had for a while about collateral funding desks needing somewhere central to trade. Its not a securities lending platform exactly, its not a repo platform either. According to the press release out yesterday, “Focused solely on funding and collateral needs, DBV-X will offer market participants cost-efficient and rapid access to a diverse range of counterparties and high-quality liquid assets. All participants sign a single standard legal agreement to join the platform and have full control over the products and counterparties used, thereby enabling a peer-to-peer market to flourish.” We’re interested in the idea that DBV-X could take any asset and put it into one agreement type. The initial iteration looks to use Euroclear as tri-party agent. But what if Tradition acts as a clearing broker for repo on LCH.Clearnet for everyone, or runs all German and Dutch buy-side transactions through Eurex Repo? We’re looking or ways that the market will consolidate product lines for the greatest benefit. Securities lending, repo and collateral swaps are all funding products: shouldn’t they all be cleared and netting together? We look forward to hearing more about this new venture.

US Tri-party data. We always thought that the way tri-party data are presented on the Fed’s website was confusing. Tri-party and GCF are broken out, but both DTCC and the Fed’s own documentation say that tri-party is everything going through BNYM and JPM’s pipes (including GCF). What’s the story? In fact, the Fed breaks out GCF as it shows on the Federal Reserve tri-party data website. This context makes it easier to understand the excellent Federal Reserve Liberty Street Economics post, “Liberty Street Economics: Lifting the Veil on the U.S. Bilateral Repo Market,” which has been updated to reflect data from October 2014. Based on these figures combined with the most recent US tri-party data, it looks like the entire US repo market is hovering about US$3.88 trillion.

Regulation vs. innovation. We are in the middle of our 2015 asset manager survey and have caught onto a trend: asset managers are expecting and/or hoping that banks will innovate their way out of current regulatory restrictions. As one manager told us this week, “regulations are there to constrain risk, but you can’t make money without taking risk. We are in the business of making money so we need to take risk.” We were quickly reminded of Michael Cyrus (DekaBank) and his presentation at this year’s Clearstream Global Securities Finance Summit in Luxembourg. As we noted at the time, “innovation is focused on lowering the cost of balance sheet, thereby increasing risk and leverage. Regulation on the other hand seeks to dampen risk and leverage and hence increase the cost of balance sheet. After 2008, the idea is that regulators have sought to roll back some innovations.” Asset managers are now looking hard at the other side of that coin.

We will be across Europe and in New York in the coming weeks to discuss T2S, collateral, liquidity and repo funding issues. We hope you can join us as we work to flesh out these evolving market dynamics.

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