Finadium’s Rates & Repo Europe conference is coming up next week and we’ve been spotlighting some of the major issues attendees can expect to get a deep dive into. Last week, we spoke with State Street and LCH RepoClear about where European market structure is heading on the back of UST and UST repo clearing mandates in the US. We now turn to comments from GLMX, HQLAX and J.P. Morgan about global liquidity patterns and the way innovative technologies are being put to work as market participants navigate disruption.
The macroeconomic and geopolitical landscape is dynamic and uncertain, said Andy Turvey, director of Sales for Europe, Middle East and Africa at GLMX, who will be moderating the Europe, the US and the Remaking of Global Liquidity Patterns panel: “[Buy-side market participants] are unwilling to commit to anything too early because the raft of new announcements that’s coming out is making it very difficult to ascertain any real direction in the market.”
Across 20+ years of experience in financing markets, Turvey has experienced turbulent and dislocated markets, and he describes the situation as one in which it’s “almost impossible to state with any real conviction how repo and lending markets are going to react, since the political (and) economic landscape is beset by uncertainty.”
US president Donald Trump’s second term has been tumultuous by any standards, with a “breathless brinkmanship forcing trading partners into concessions designed to deliver on the ‘America First’ election promise”, with strategists, politicians and investment professionals in a “state of constant consternation”, he noted, adding that the relatively calm waters of 2024 in financing markets are going to be a distant memory, but once markets see a direction, buy-side firms can be expected to take positions and this activity will be reflected in repo markets.
In Europe, the European Central Bank’s (ECB’s) quantitative tightening program is reversing the US bond basis trade, and opportunities to net off balance sheet have disappeared, which is going to require dealer repricing and possibly a move into UK gilt futures basis, Turvey said: “We will see the fast money look for opportunities in relative value trading…Hedge funds will start to get involved soon enough (and) equities trade seems to be more immediate than the fixed income markets at the moment.”
New tools and infrastructure innovation
In contrast to securities lending, for which lenders are bemoaning the lack of specials and narrower spreads across some asset classes, repo continues to hit new highs in volumes and transactions with new entrants on both buy- and sell-sides.
“We can be relatively confident that these markets are fairly robust…We’ve seen time and time again that the buy-side and the sell-side have now got a much more harmonious relationship (and) the markets have been proven themselves capable of withstanding shocks and making sure that they remain open and liquid no matter what comes down the pipe,” said Turvey. “We’ve got the tools, we’ve got the infrastructure.”
One of the most closely watched innovations in the repo market is the advent of blockchain for intraday liquidity at a time when the markets are exploring alternatives to credit lines, said Erica De Rosa, Solutions Architect at HQLAX, who will be speaking on the Funding and Liquidity On Chain panel.
Intraday repo on chain, she noted, is not necessarily a major focus for repo players aside from the execution coming across its desk, she explained: “The product has more of a business case in the liquidity management function more so than a traditional repo trading function…and the reason on chain (is) a no brainer is because the technology allows for precise trading, to the nearest minute.”
At the same time, using the same technology has benefits for repo traders for term and overnight trading, and its application has benefits not just for individual firms, but the market as a whole, she noted.
The tipping point for adoption is a combination of regulatory approval, overcoming internal governance hurdles, and critical mass of liquidity for the product itself, she added.
On chain demand drivers
The demand for on chain secured intraday repo is driven by capital efficiencies in an environment where institutions are pressured to optimize their capital usage under requirements to maintain substantial reserves, said Francesca Amendola, managing director and head of EMEA Fixed Income Financing Sales at J.P. Morgan.
Her team provides advisory, solutions and execution coverage across fixed income financing products. The intraday repo platform, called Digital Financing, taps J.P. Morgan’s private permissioned blockchain infrastructure, Kinexys Digital Assets, to tokenize traditional fixed income collateral and enable electronic execution plus DvP on chain settlement.
Traditional intraday liquidity sourcing often involves manual processes, multiple intermediaries, reconciliation, all of which may lead to inefficiencies, delays, and increased settlement risk, explained Amendola. Much of these issues are resolved with on chain intraday repo.
“These on chain repo transactions can technically settle 24/7, so we are not talking about settlement dates of repo, but settlement at times of repo. Precise settlement times and interest calculated by the minute is a game changer for liquidity management,” she said.
There are other important drivers of demand, not least of which is reducing counterparty risk. But one of the most eye-catching is the potential for cost savings. By diversifying the source of intraday funding, clients can reduce the dependency on costly unsecured financing and uncommitted credit lines.
“Repo documented by GMRA presents lower capital charges, mitigated counterparty risk, more favorable LCR treatment, less impact on leverage ratio, even more detailed reporting,” she said. “It’s a more efficient financing method, more secure, more cost effective compared to unsecured intraday liquidity sourcing methods that we see today.”
Amendola added that trading on blockchain guarantees transactional security and transparency because of the blockchain’s features, such as an immutable ledger: “At a time where regulatory scrutiny is at the highest and compliance requirements also are increasing more, institutions can be more confident in the accuracy of the transaction they are executing and in their financial records.”
Over 2025, J.P. Morgan is expanding capabilities from fixed income collateral to equities collateral, from dollar and euro collateral to sterling collateral, and as the platform evolves, demand will naturally grow, she added.
Andy, Erica and Francesca will be joining colleagues from DNB Markets, Eurex, European Investment Bank, iA Global Asset Management, LCH and Santander on their panels at Rates and Repo Europe on March 19. Rates & Repo is a conference for cash investors, dealers, market intermediaries, technology firms and other service providers. Register here for the in-person panel discussions.