An apt metaphor for today’s many instruments in global money markets is that they live in houses next to one another and have deeply shared interests, but rely on antiquated, manual workarounds to navigate the fences and tiny windows and doors throughout their properties. What could happen if instead of separate execution portals for individual money market instruments, traders in short-term cash could use a single, comprehensive and seamlessly integrated interface for repo, time deposits, certificates of deposit (CDs), total return swaps, short-term sovereign debt and commercial paper? This is the opportunity in front of market participants.
The sudden move to working from home that occurred in March 2020 erased some long-held expectations about technology in the money markets space. Technology received a sharp upgrade in the minds of many senior managers – from a collection of workflow functions to solutions for comprehensive challenges. A primary focus became internal coordination among portfolio managers, traders, risk and operations staff, all working from separate locations. Some technology projects were sped up to accommodate this change while other priorities settled to the back. As we near the end of 2021, new opportunities from this rethink have appeared that enable the application of cross-product functionality in money markets trading. This is likely to have a lasting impact for market participants.
Short-term cash, collateral and derivative investment markets are among the largest in the world, with at least $20 trillion outstanding across repo, commercial paper and time deposits. There also are OTC derivatives like FX swaps, which the BIS estimates at $28 trillion outstanding, and short-term government securities. US Treasury bills with maturities under 1 year are themselves a $4 trillion market. Including a wide variety of money market instruments, the total universe of short-term investable products could easily be over $60 trillion.
This diversity of instruments can create difficulty for traders on both the traditional buy and sell sides; it would not be much of a leap to call the overall market dysfunctional from the perspective of managing opportunities across products and geographies. Portfolio manager decisions often come down to checking different prices on different screens and sending that decision to traders, who then use their own technologies, emails and chat messages to get the trade done. This process affords insufficient internal transparency to accurately assess the all-in value of a specific trade across instrument selection, price, risk, and settlement costs.
This long-existing state of money markets trading is, encouragingly, beginning to change. The next evolution is likely to feature integrated access to liquidity pools across instruments and provide active relative value analysis, risk and credit limit management and Straight-through-Processing (STP), and will support ultra-efficient decision making across a range of decision variables. While short term markets began the digitization of individual instruments some years ago, a fully integrated digital ecosystem will add substantial value to market participants.
The standardization problem
The money market ecosystem contains products that range from largely standardized to highly bespoke. Unsurprisingly, infrastructure support – from analysis to execution to processing – for these products can be uneven as well, with some products in some countries benefitting from standardization while others remain wedded to bilateral idiosyncrasies.
Standardized products rely on legal identifiers and market infrastructure that support settlement processing. The Global Legal Entity Identifier Foundation includes money market instruments in their Legal Entity Identifier (LEI) system; a search on commercial paper yields almost two million results. DTCC’s Central Trade Matching platform provides a set of instructions for matching time deposits even when there is no ISIN or secondary market. European commercial paper issuance and settlement has benefitted from electronic messaging and increasing STP rates for 20 years. China’s Asset-backed Commercial Paper (ABCP) issuance, already on the opaque side of the spectrum, tends to be sold directly to investors by corporates with few if any guardrails.
Inconsistency and opacity are the nemesis of efficiency and make global money markets difficult to risk-adjust, hard to trade, less liquid and in need of additional information to settle, track and report.
What does an integrated money market ecosystem look like?
While there is no prescribed recipe to “streamline the money market neighborhood” and while earlier efforts have failed, we at GLMX believe that earlier attempts have yielded a couple of important lessons. First, the “bolt-on” approach has proven repeatedly unsuccessful. This is when complex transactions like repo are retrofitted to outdated technologies originally designed to accommodate the relatively uncomplicated process of buying and selling standardized instruments (think equities). Second, “consumers”, whether buy or sell side, place enormous value on liquidity and choice.
Building on these lessons, GLMX’s approach has been from the start to combine modern, exceptionally reliable and flexible technology with a deep understanding of money market flows and interdependence. GLMX iterates on both fronts as technology improves and as our understanding of client needs evolves and deepens. Our original technology was developed in 2010. And just like a smartphone introduced in 2010 would no longer be fit for today’s purposes, we chose to rebuild GLMX technology from the bottom up in 2018 – specifically with a global, integrated ecosystem in mind.
Our future view of global money markets is filtered through the lens of “how do we get there”. The old phrase, “easy to do is easy to say” reflects the ease of identifying a vision of the perfect future without considering the never-ending and always-changing demands of the market. Without a plan for executing simultaneously on both technology and ecosystem, a vision remains a dream.
In today’s era of Modern Monetary Theory, quantitative easing, ample reserve management, towering sovereign debt financing and near or below zero interest rates, the need for efficiency and transparency in global money markets cannot be overstated. If executed thoughtfully using the powerful tools of modern technological architecture and construction combined with a deep, client-led and future-looking understanding of market structure, those twin needs will be served to the mutual benefit of all market participants. At GLMX, we spent years identifying an executable path to that future, starting with repo. With that powerful and market-proven foundation in place and extending the earlier metaphor, we now see a clear path to a modern money market neighborhood with large windows and doors and unlocked gates. When executed effectively, the underlying dynamism of these critical markets will be unleashed.
About the Author
CEO and Co-Founder
Glenn is a 22-year veteran of JP Morgan Chase where he served as Managing Director responsible for Global Liquidity Management and as Chair of the Liquidity Risk Committee. His responsibilities within the Global Treasury Division included oversight of all debt issuance for JP Morgan Chase and its subsidiaries; development and implementation of the Bank’s asset and liability management process; and establishment of the Bank’s liquidity risk policies. Glenn holds an AB/Economics from Dartmouth College.