In a recent article, Eurex Repo examined why buy-side firms have joined Eurex and the benefits they have enjoyed since doing so. As well as focusing on the European market, it looks at Eurex’s buy-side access models and where these demonstrate similarities to US practices.
A key driver in the rise of European cleared repo has been the growing presence of buy-side institutions at Eurex. Buy-side firms executed approximately 16,000 trades in 2023, with an average ticket size of €200m. Their share of outstanding volume at Eurex so far in 2024 has increased by about 15% from the same period last year. This is set to increase again, with new buy-side firms in the process of onboarding to Eurex, where they will join 15 already active firms. In total, the number of cleared repo market participants at Eurex now stands at 165.
These market participants bring valuable diversification to the liquidity profile of cleared repo and to some extent also insulate repo activity from ECB monetary policy. As they are unable to access ECB funding programs, their presence at Eurex is a reliable one, helping to support more consistent liquidity.
Many buy-side firms, particularly Dutch pension funds, have been drawn to Eurex cleared repo because of their obligation to post variation margin under Uncleared Margin Rules. This has created the need to access cash at quick notice — sometimes within half an hour.
While this can sometimes be done via bilateral repo channels, this market has the tendency to seize up during times of market stress. Given the cautious approach of pension funds, the security of being able to access cleared repo during all market conditions has made clearing fees a price worth paying.
Once they become part of the market, buy-side firms have enjoyed new operational advantages from the clearing infrastructure. These include a multilateral agreement that allows for trading with 150 banks — far higher than the 20-30 relationships that an average large buy-side firm would have in the bilateral market.
“There are hardly any other options to access repo liquidity when it is most needed during stressed market conditions,” says Frank Gast, managing director and global head of Repo Sales at Eurex. “It is a scenario that the banks and several buyside firms themselves have prepared for over the last couple of years by joining Eurex. Buy-side firms are now able to go into our markets and trade with potentially more than 150 banks who have the ability to net their balance sheet exposures. It is really attractive as a liquidity pool.”
Facilitating access
In order to accommodate the buy-side, Eurex has introduced three ISA Direct models that facilitate the more challenging aspects of CCP participation. Obligations such as default fund contributions, which are a routine part of sell-side participation, are onerous if not prohibited for much of the buyside and do not fit with their business models.
Each of Eurex’s three models is tailored to the varied profile of the buy-side. The standard ISA Direct model was designed for pension fund needs, with more efficient and reliable cash management. It also allows these participants’ sponsors (a clearing agent) to handle their default fund contributions.
ISA Direct Indemnified is targeted at the hedge fund community, a new slice of the buy-side for Eurex cleared repo and one from which firms are in the process of onboarding.
“This model closely resembles the FICC sponsor model, which in recent years has exploded in popularity in the US,” says Frank Odendall, head of Product & Business Development for Repo and Securities Lending. “Under the Indemnified model, sponsors provide a guarantee to cover their clients’ exposures in the event of a default towards the CCP. This varies from the standard ISA Direct model, which caps sponsors’ exposures. Despite the indemnity, this model also grants some balance sheet relief to the bank sponsor.”