Finadium: Trade Repositories for Securities Lending and Repo

Trade repositories in securities lending and repo are emerging as new tools for regulatory officials to monitor and assess risk within financial markets. Realistically, these trade repositories will not come into existence for some years to come still but the planning phase is actively underway. The time is now for market participants to get involved and ensure that the future end result will have at least neutral, if not positive, impacts for their business. A new report from Finadium, “The Design and Impact of Trade Repositories for Securities Lending and Repo,” looks at the details.

The purpose of a trade repository is to bring transparency by allowing regulators and other stakeholders to analyze an aggregation of market activity. This is helpful for risk analysis and trend spotting. A trade repository may seem like a simple data storage facility, but the underlying operational and regulatory framework that mandates its existence is what makes it unique.

Trade repositories currently exist for credit, interest rate, and equity derivatives; the experiences of OTC derivatives markets should educate and forewarn the securities lending and repo communities. As one example, a single trade repository alone works well with the data it captures, but multiple repositories each capturing their own data sets and expecting to harmonize transactions can turn one process into an exercise with uncertain success. The design and mechanisms for data collection are critical inputs to ensure that trade repositories work as initially hoped.

Regulatory officials, led by the Financial Stability Board (FSB) and the European Central Bank (ECB), hope to amass the largest dataset of securities lending and repo transactions from across the globe. For the first time ever, officials hope to be able to examine the particulars of an industry in detail. This would begin with the specific attributes of the trade itself including collateral and tenor, to an examination of the entities involved, all the way up to aggregation across asset classes, geographic regions, and the market as a whole. The amount of information and the ability to interpret it from multiple angles will be extraordinary. It is expected that bank and non-bank entities will all be required to report their securities finance transactions to their local trade repository.

The ability to submit transactional level details to a regulated trade repository will require multiple levels of new infrastructure. Many firms, notably smaller asset management companies or firms with small IT departments, may have difficulty upgrading to meet the new requirements and will instead turn to existing technology vendors, tri-party agents, or CCPs for assistance. As the market adapts to new rules, this too will create new requirements for service providers to build the pathways and compliance mechanisms necessary to deliver transactional data.

This Finadium report takes an in-depth look into what securities lending and repo trade repositories mean for market participants. We review the design of trade repositories for other markets and the regulatory initiatives focusing on securities lending and repo. We conclude with recommendations for improving the proposed design and challenges that market practitioners should seek to mitigate.

Finadium subscribers with logins can log in to access this report.

For non-subscribers, more information on this report and subscription information is available on the Finadium reports home page.

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