The repo market’s dynamic has gone from docile to volatile and there’s a greater need to understand its interconnection to other products and markets. Ahead of Finadium’s Rates & Repo conference, we speak with our panelist experts about some of the economic and political backdrop driving trends as well as what firms need to be thinking about to manage the new environment.
The broadest trend that market participants are adapting to is “cash as an asset class”, said Glenn Havlicek, CEO and co-founder of GLMX, a platform trading money market instruments reporting some $1.5 trillion in daily balances in July and nearly $1.8 trillion currently.
“There is a massive difference between interest rates at or near zero, with close to zero volatility, and a world where short-term interest rates are over 5% in the US,” he explained. Even outside of the US, rates are going positive across the G7 with the exception of Japan, though central bank signals seem to be indicating that could change. Moreover, volatility in fixed income markets – sovereign and corporate – has ratcheted up dramatically over the last few years. This comes along with significant issuance across the G7 while markets come to terms with higher for longer inflation.
In the US, appetite for increased issuance is being closely watched and may have reached a turning point, with a recent auction showing signs of “indigestion with respect to absorbing supply”, noted Havlicek: “We’ve had a dramatic lack of discipline in fiscal policy for the longest time, and interest rate risk management matters. And one would suggest, given the cost of servicing the debt, that we might have been able to do that a little bit better as a country. A lot of the implications of that manifest themselves in the cash treasury market but increasingly in the repo market.”
One example is the basis trade, which has been eyed as a risk indicator by the Bank for International Settlements as well as market industry experts speaking at a CFTC roundtable. However, Havlicek points out that this trading strategy is common and beneficial: “People lever up when they have an opportunity to take advantage of mispricing…it helps discipline pricing and it also helps add liquidity.”
He added that looking at the markets in isolation, be it repo, time deposit, or securities lending, misses an “important and powerful” trend that’s happening: “You’ve got an ecosystem which was pretty docile for a long time that now needs to find its way to both convergence – which is do more things in one place – and efficiency, which is to take on these increased volumes and this increased activity more efficiently.”
Connect the dots
Repo has long been dominated by manual and voice trades and the transition to electronic has been gradual, though it did get a boost when market participants moved home during the pandemic. Now, volumes are ticking up as the work done to move to electronic trading platforms kicks in, said Joanne Crisafi, managing director for Money Markets & Repo at Tradeweb.
“It takes time to fully integrate on to a platform, and it’s something that you need to plan ahead of time so that you can participate at the level of your competitors,” she said.
There have been several significant market shifts driving participants to the benefits of electronic workflows, such as integrated order trails, straight-through processing and immediate access to liquidity among them. Integration of STP workflow, for example, removes all the back-office manual booking of trades and reduces errors and fails, one of the big selling points for clients, Crisafi explained.
One of those dynamics has been the Fed’s overnight repo facility going down as rates went up –Tradeweb encouraged clients last year who were not already executing electronically to start so they would be ready when volumes came back into the market, a significant portion of which went into repo.
“The all-time high for FICC sponsored repo volumes last year have also contributed to electronic repo gains for Tradeweb,” she said, adding that through the use of a trading protocol that allows dealers and clients to designate trades for FICC sponsorship, its platform volumes for sponsored repo have increased 145% year-over-year for FICC trades.
“It’s not unusual for a regulation to move clients to platforms,” she said. Now, Tradeweb’s team is focusing on getting clients ahead of the curve for anticipated UST and UST Repo clearing reforms.
At the same time, repo is part of a larger trend of cross-market trading across cash and derivatives. On Tradeweb, for example, a client can execute a repo transaction, connect to the swap platform and execute an overnight index swap. It’s part of “connecting the dots” between repo trading and other supported markets, she explained.
Glenn and Joanne will be joining colleagues from BNY Mellon, Federated Hermes and J.P. Morgan on the panel “Market Conditions in US Repo” at Rates and Repo North America, where they will discuss these and other major market trends. 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 on November 2.