The increasing frequency of liquidity problems in repo markets – very obvious in the March 2020 sell-off – have been exacerbated by a low adoption of electronic trading and regulatory limits on bank balance sheets. However, over the past year e-trading of repo has boomed, says Erica Barrett, managing director of institutional rates at Tradeweb.
As buy- and sell-side firms have adopted e-trading market operators are forming hubs that bring multiple liquidity providers together, despite the challenges of hooking up the unique workflows that trading desks often use.
Dan Barnes Welcome to TRADER TV, I’m Dan Barnes. Disruptions to liquidity in the repo markets have been happening with increasing frequency and unpredictability over recent years. Joining me today is Erica Barrett, managing director of Institutional rates at Tradeweb, to discuss how market structural changes can improve liquidity. Erica, welcome to the show.
Erica Barrett Hi. Thank you for having me, I’m glad to be here.
Dan Barnes So tell us, in 2019 we saw the US government pump liquidity into repo markets. Yet at the year-end of 2020, things seem relatively quiet. Do you think we’re going to see a repeat intervention in 2020?
Erica Barrett The Fed will continue their overnight repo and reverse operation to provide a backstop in the event that there is a liquidity issue in 2021. The overnight operation has not been utilized since early July, which indicates that there’s been enough liquidity in the market for many months. We do know that if the Fed needs to step in, they will. They did in 2008 and again in 2019 leading into 2020. The Fed support does help the mentality of the general public and of traders and can provide stability in markets during something like we’re seeing with the coronavirus pandemic.
Dan Barnes What would you say are the underlying causes of illiquidity in the repo markets at the moment?
Erica Barrett Liquidity issues in the repo market arise when participants want immediate access to their cash and start liquidating assets quickly. This is what happened in March. Funding markets seized up when New York and other states began to shut down because of the pandemic. As prices in equities and bonds became extremely volatile, funding for spread product evaporated and only high quality, liquid assets like US Treasuries were trading, though sporadically, in the funding markets. These stresses led to forced selling of off-the-run treasuries. However, due to regulations, banks were limited in the number of treasuries they could hold on their balance sheet. The Fed really needed to provide a backstop, so in addition to, as we’ve discussed, the overnight and term repo facilities, the Fed stepped in to buy treasuries and mortgages on an outright basis. And at the end of March, beginning of April, the Fed announced a temporary change to the supplementary leverage ratio rule, which remove the restriction on the number of treasuries that a bank could hold on its balance sheet. Another contributing factor to the illiquidity in the repo market has been the slow adoption of electronification. We know that trading solutions improve transparency, streamline workflows and create efficiencies for a marketplace. We saw with everyone working from home that it became more and more important to be able to connect with the other side of a trade. And I think that’s why electronic trading has really taken off.
Dan Barnes So to what extent are these challenges actually market structural challenges?
Erica Barrett The repo market has long been considered opaque and slow moving with regards to embracing new technology, but we know that manual processes reduce efficiency. This year, however, the growth of repo electronic trading has boomed. On Tradeweb we’ve increased the number of repo dealers from 14 to 27, our average daily volume nearly doubled in 2020 alone. We’ve seen a market shift driven by dealer and client participation, where the benefits and efficiencies of electronic repo have been quickly adapted and encouraged. Negotiation, time to quote, pricing of collateral, straight-through-processing are just a few examples that have helped drive this movement.
Dan Barnes You mentioned some of the mechanisms that you’re introducing there. Could you give a broader outline of how market operators are alleviating liquidity?
Erica Barrett Tradeweb repo connects market participants electronically to negotiate, execute and straight-through-process their daily repo transactions. What was once done solely via voice chat can now seamlessly be executed on one screen across multiple liquidity providers with the click of a button. Many market participants believe their workflow is unique, and it usually is, but Tradeweb has been able to tailor our platform to support each user’s needs. Gone are the days of fat fingered tickets, pricing underlying securities and manual booking of internal tickets. Tradeweb has become the market solution for transacting and booking repo transactions globally.
Dan Barnes You mention some very impressive figures in terms of your growth this year. How have you been reaching out to market participants?
Erica Barrett As the numbers show, our model of offering a flexible and efficient workflow is very successful. We have a dedicated repo team here at Tradeweb that focuses specifically on dealer and client engagement. This team coordinates with our support, integration, technology and sales teams internally, while working closely with each buy-side and sell-side participants to help solve for unique trade flow issues and create efficiencies in what we know is a complex repo market.
Dan Barnes If I’m working for a bank or an asset manager or a hedge fund, for that matter, and I want to engage with Tradeweb in the repo space right now, what should I do?
Erica Barrett Tradeweb makes the onboarding very easy for both buy-side and sell-side traders. For clients that are new to Tradeweb, the Tradeweb application is a very simple desktop install.
Dan Barnes That’s great. Erica, it’s great to hear such a big success story this year. Thanks very much for coming on.
Erica Barrett Thank you for having me.
