Ahead of Finadium’s Rates & Repo conference on November 2, we speak with our experts on what’s happening with repo liquidity and where it might be going in a dynamic markets, regulatory and technological environment.
Entering mid-October, central bank actions continue to be obsessively watched as market participants try to read into how the Federal Reserve will implement monetary policy amid inflationary forces. This has led to rising interest rates and quantitative tightening, which have had a significant impact in the US markets, said Joe DiMartino, managing director of Repo Trading at Clear Street and panelist.
“Besides the obvious cheapening of rates, the supply of US treasuries has been deeply impacted,” he said. “We have gone through a big shift now. The Fed is no longer a buyer in the market, so volatility has definitely increased (and) the specials market has picked up dramatically.”
DiMartino has been in securities financing for some 30 years, with the last 25 being in trading roles. Over the years, he has gained expertise in repo and short-term interest rate products, and in late 2021 he joined Clear Street to help launch a repo platform.
Clear Street is a fintech company currently building out a cloud-native platform on AWS to improve access to the capital markets, beginning with prime brokerage. The firm is looking to “desilo” the front-middle-back office configuration as well as the division between asset classes, including securities financing. Typical clients include hedge funds, asset managers and family offices.
DiMartino has seen more issues trading “deep into negative territory” than ever relative to the Fed Funds Rate, a situation that is expected to continue until the Fed “takes their foot off the gas pedal”, he added. Until the end of the year, markets are pricing in a further 125 basis points in hikes.
Funding over year-end
Always a top concern for repo participants, year-end is fast approaching and there’s plenty of discussion about the extent to which ‘this time is different’ because of the wider global economic dynamics, not least of which are hawkish actions from major central banks.
Echoing comments we’ve heard from Europe, DiMartino noted that with higher interest rates, more attention will be towards funding over year-end with tight balance sheets: “As spreads widen, the larger banks will be forced to reallocate balance sheet but we think that might take some time…If we see significant backup in rates, it might tell us that the larger bank community has not quite got to the point of increased balance sheet size.”
The first wave of increased repo volume will be absorbed by the less regulated broker dealer community, he added: “If the levered community continues to need balance sheet, we think that the smaller-broker dealer community will be able to handle it to an extent…We’re seeing from our clients a need in the short term for balance sheet but they’re also thinking down the road for potential increases in balance sheet over the next three, six, nine, months.”
Liquidity-seeking tech
Across the world, markets have been “lulled into a sense of sufficient capacity because of an era of five to 10 years of abundant liquidity and very stable, near-zero interest rates,” said Glenn Havlicek, CEO and co-founder of GLMX, an electronic repo and securities lending execution platform.
What’s the same as it’s ever been is that when rates are volatile, traders are going to need to navigate market complexities in the search for liquidity. But what’s different now is that it’s not going to look like a dozen traders scrambling to fill orders by phone.
“We are back in a world where you need to have as many liquidity outlets as possible and technology is at the point where — both from the standpoint of number of users, ergo the size of the liquidity pool and the functionality (of) the technology itself — it can be done easily and efficiently [with that technology],” he said. “And at the end of the day that is what everybody is after.”
Joe DiMartino and Glenn Havlicek will be joined by colleagues from Natixis, Tradeweb, and BlackRock at Rates & Repo, a conference for cash investors, dealers, market intermediaries, technology firms and other service providers. Register here for online panels on November 2 and a live reception in New York on November 3.