Finadium’s Rates & Repo North America conference is fast approaching, and we’re highlighting early insights to get you prepped for our industry-leading event. In our second article, we hear from our expert panelists from J.P. Morgan and OSTTRA about how repo markets are adapting and reconfiguring as a result of both widespread operational trends in capital markets and more specifically, the UST repo clearing mandate.
Repo integration across the front-middle-back offices should aim at two priorities: resource optimization and operational streamlining, and this begins with investing in data, said Charles Engle, executive director at J.P. Morgan, who will be speaking on the “Reenvisioning repo from front to middle to back office” panel: “Investment in data management doesn’t get prioritized as it potentially should. If I have the right data, it helps make decisions in the front office, get that data down to various systems and counterparts and unlocks a lot of opportunities.”
Those opportunities include improving customary activities in the market, such as identifying cheapest to deliver amid dynamic liquidity conditions, but also expanding the financing market with unique transactions for new entrants, such as a recent trend of corporates tapping collateralized deposits, which operate like a repo, he explained.
Moreover, the success of integrating advanced technologies, like artificial intelligence (AI) and distributed ledger technology (DLT) is dependent on both up and down stream data.
For the former, J.P. Morgan is exploring large language models for data standardization and optimization. In DLT, meanwhile, Engle pointed to J.P. Morgan’s intraday repo on blockchain, noting that it’s seen steady growth over the last few years from millions to billions in daily customer-facing transactions. He also highlighted the bank’s Tokenized Collateral Network, which boosts deployment and mobility of assets as collateral, such as money market funds.
Enterprise-wide data standardization does not come cheap, and Engle noted that firms need to take advantage of vendors. As a triparty agent (TPA), standardized reference data and pricing is part and parcel on J.P. Morgan’s platform, however, for firms with multiple TPAs and bilateral obligations, optimizing resources, such as managing eligible collateral across different venues and providers, is material.
“You don’t want to necessarily focus your investment dollars internally on trying to standardize that just so you could start thinking (about how) to best decide where to use this particular asset across different tri-party and bilateral obligations,” he said, adding that data strategy and standardization should consider front to back office requirements and how return on investment can be realized most optimally through a thoughtful build versus buy approach.
UST repo clearing shake-up
Fifteen years ago, the OTC markets embarked upon their wave of mandatory clearing, and how repo markets work front-to-back can be viewed in comparison with what has been achieved in other products and asset classes to comply, said Vikash Rughani, head of Product Design at OSTTRA, who joins Engle on the panel.
The established solutions in other cleared markets, notably derivatives, are proven in helping firms realize all the benefits of clearing — such as choice, multilateral netting and counterparty risk mitigation — and incorporate connectivity, matching and agreement processes, capital and margin optimization practices, and compression, all which need to be in place for the value of clearing to be fully realized, he added.
One of the defining features in facilitating that shift is confidence that transactions will clear no matter the execution model, and this translates directly to non-members of clearinghouses and central counterparties (CCPs) now looking at impacts of the US Treasury clearing mandate.
“There’s a very tight relationship between risk being put into a clearinghouse and the multilateral netting capabilities that a CCP brings,” he explained. To protect themselves, CCPs charge margin, which requires significant account and connectivity set ups so that the executing venue and counterparts don’t need to worry about trade rejection and concomitant process inefficiencies.
OSTTRA, for example, runs an independent pre- and post-trade credit checking service called LimitHub, which is based on a venue and CCP-agnostic standardized workflow model that’s been proven for rates and credit markets, Rughani explained, adding that it’s exactly these types of non-proprietary tasks and processes that firms should outsource.
“The ability to rethink from the ground up so you have confidence that you are capturing everything you need to when you’re standardizing your data is a rare luxury (and) technology nowadays can help us resolve in (outsourcing) the tasks,” he said.
Charles and Vikash will be speaking with fellow experts from DTCC, GLMX, RBC Capital Markets, and Tradeweb on the Reenvisioning repo from front to middle to back office” panel, taking place in New York on November 4. Rates & Repo is a conference for cash investors, dealers, market intermediaries, technology firms and other service providers. Register here for the in-person discussions.