ION in partnership with analyst firm GreySpark Partners published a research report, Trends in Repo Trading 2023, which examines how the repo market has turned to more automated trading technologies to meet new transparency demands, and how this has affected broader trends in the global repo marketplace.
GreySpark interviewed a number of Tier I, Tier II and Tier III CIBs for the report.
Key findings include:
- Among Tier I and Tier II-plus international institutions the “current state” of the sell-side repo trading industry is characterized by fully electronic D2D business models, running in parallel with e-manual D2C trading operations, supported by automated front-to-back technology stacks.
- However, among Tier II-minus and Tier III to Tier VI regional corporate and investment banks (CIBs), manual sales-trader workflows remain pervasive across D2C and D2D trading activities.
- The demand for repo liquidity has now returned to “normal functioning” following the post-financial crisis era of 2013-18.
- Institutions looking to increase their automated repo capabilities face four identifiable challenges: the unstandardized nature of repo instruments, complexity of instruments, persistence of voice-trading and pockets of opacity.
Following the onset of the 2008 financial crisis, an ensuing period of markets re-regulation between 2010 and 2019 arguably altered the historical structure of trading activity across every major asset class except one – the global market for repurchase agreements, which was largely left untouched from a structural perspective as part of the overall shadow banking sector.
However, this gap in the post-2008 capital markets regulatory landscape was subsequently addressed by the July 2020 go-live of the EU’s Securities Financing Transactions Regulation (SFTR), which set new standards for corporate and investment banks (CIBs) and their repo trading clients or counterparties – that is, asset managers, fund managers, institutional investors and other types of buyside firms and sellside institutions – through its creation of new, robust standards for post-trade transparency.
As a result of the implementation of the SFTR – along with other, global-in-scope regulatory mandates – CIBs and their clients or counterparties across dealer-to-client (D2C), dealer-to-dealer (D2D) and triparty markets for repo liquidity began responding to the new requirements by automating historically manual, voice-centric trading business models through the introduction of upgrades to ‘legacy’ trading technology stacks.
GreySpark Partners believes that these changes can broadly be understood as a transition from manual to e-manual repo trading, which is characterized by the introduction of application programming interfaces (APIs) and degrees of straight-through-processing (STP) as a means of smoothing the transmission of transaction data from front-office sales-trader workflows, to middle-office trade booking and risk management, and back-office post-trade processing.
Differences in the current-state of repo trading business model operations between international versus regional CIBs belies desire across the industry to overcome persistent levels of repo market resistance to trade automation and electronification by simply shifting to an e-manual state in terms of process and workflow or in terms of systems and technology. Instead, this report explores the automation and electronification opportunities that could be created for a CIB repo trading business operated using a streamlined technology stack.