Repo markets are evolving from a short-term funding tool into a strategic pillar of fixed income trading, driven by higher interest rates, increased sovereign issuance and growing collateral demands, says Yama Darriet, head of OTC and repo expansion at Euronext.
Speaking to Trader TV, Darriet discusses where he sees central clearing, healthy competition, sponsored access models and greater margin transparency helping to address balance sheet constraints and improve liquidity access.
Looking ahead, he expects automation and seamless connectivity across trading, clearing and settlement to underpin the market’s next phase of growth.
Interview
Josephine Gallagher – Welcome to Trader TV, where we explore the trends shaping global markets and institutional trading. Repo markets have seen strong growth over the last few years, and we are now at an inflection point. So, what’s behind this expansion? Where are the remaining pressure points for dealers and buy-sides, and how are policy changes and innovations in central clearing redefining participation in repo and fixed income trading? Here to discuss the growth challenges and what comes next for the future of repo markets is Yama Darriet, head of OTC (over-the-counter) and repo expansion at Euronext. Yama, lovely to see you.
Yama Darriet – Hi Josephine, thank you for having me.
Josephine Gallagher – So the repo market has seen exponential growth over the past few years. What are kind of some of the biggest drivers behind that expansion?
Yama Darriet – Yeah, you’re right. It’s really a combination of factors, right? From a macro standpoint, higher rates, stronger sovereign bond issuance, and higher volatility has been driving this growth in the market, and at the same time, we can see that banks and also investors have been looking much more closely in the way that they manage balance sheet constraints and also collateral. And I would say that regarding balance sheet constraints in particular, there is a real case for repo clearing in particular, right. Because clearing can deliver netting efficiencies, enable clients to get access to liquidity, to risk management, to default management processes. So it really brings a case for repo clearing, and also the market has been growing in scale, right? In the latest ICMA survey, the market was up to 30 point 7 trillion euros in December 25, so 11% up compared to the latest survey, 25% year on year. So the market is growing in volumes, but this growth is not only about volumes. The repo market is becoming more systemic, more central to funding, collateral management, and to liquidity overall. So it’s really about a market going from a short-term funding tool to a more strategic piece of the fixed income value chain.
Josephine Gallagher – Okay, lots of growth. Then, so despite this growth, though, what are some of the key challenges that dealers and buy sides face today?
Yama Darriet – Yeah. So the demand is there. So I think that the challenge is really about the access and to getting an efficient access to the repo market. So dealers want to provide clients with access to the repo market, repo liquidity, but they are limited by balance sheet constraints that I just mentioned before. They need to respect leverage ratios, capital requirements, so all that is limiting their capacity to provide end clients with the services that they would like to provide to them, and on that sense, repo clearing can really be an answer, right? Because clearing enables clients to get access to a large pool of liquidity, to netting benefits, to risk management, to default management. So it’s really an answer to this challenge that banks are facing in terms of balance sheet constraints and capital requirements. And then the challenge for the buy side is really about getting access to clearing. Right, I mean, buy side have been able to access clearing houses through existing sponsored access model, but they’re really looking at getting something that is scalable from a legal standpoint, from an operational standpoint, and also from a cost standpoint. There is also a challenge around margins in general. So in the research that we have just performed with clients, with both dealers and in the buy side community, clients have been asking for more margin transparency, and this really has an impact in the way that they manage collateral. Right, so the challenge is not just about clearing more volumes, but doing so in a way that is efficient for clients in terms of access, in terms of operational ease, in terms of economics, but also in terms of transparency, to enable them to use this as a tool to manage collateral and liquidity.
Josephine Gallagher – Okay, understood. And so you mentioned the role of central clearing, and a large portion of repo trading is actually centrally cleared by some of your competitors in Europe. So, how does Eurox seek to disrupt this space? How do you expect to innovate in response to that growth and also target some of the challenges there?
Yama Darriet – Yeah. So, what we are trying to bring to the market is more choice, more innovation and eventually, more competition. At Euronext, we launched the repo expansion initiative two years ago. We have been expanding the scope of Govies (government bonds) that we are able to clear to all major European sovereign bonds and supranationals, and we really aim to bring to the market a more efficient way to tap liquidity, to manage risk, and also to manage collateral. We have been shaping this around some key features. So, as I mentioned before, we are expanding the scope of products that we are able to clear, but we are also working on our risk model to bring more margin efficiencies to clients without compromising risk management. We’re working on collateral management solutions, and we’re doing that with partners. We have announced partnerships with EuroClear, Clearstream, BNY Mellon for triparty collateral management, and we will be launching soon a new sponsored access model in July 26 to enable buy-side clients to tap central clearing without the burden of a traditional clearing model. And also, what is important to say is that a big challenge of this market is around a seamless connectivity across the value chain, and at Euronext we are privileged to be present all over the value chain, right. We have MTS, which is a trading infrastructure for fixed income. We have Euronext clearing, of course, but also Euronext Securities on settlement and custody, and this presence all across the value chain enables us to provide clients a seamless way to connect to fixed income markets. Once again, both from an operational standpoint and from a financial standpoint.
Josephine Gallagher – Very interesting. So to elaborate further, how can new innovations and also like partnerships in clearing actually, you know, impact the way hedge funds and asset managers participate in fixed income markets?
Yama Darriet – Yeah, I think that for buy-side clients, the challenge is really about building an efficient access to central clearing. These clients do not necessarily want to get the burden of a traditional model, so they need a sponsored access model that is efficient. In the survey that we have launched at Euronext, we have seen that 96% of respondents actually think that a sponsored access model is one of the key tools to get access to repo clearing. And what we need to have in mind too is that these participants can be quite different, right? So we are speaking about hedge funds who may use repos for value strategies, for example. We can be speaking about asset managers who can use repo for funding and also collateral management, and we can also be speaking about dealers who want to deliver services to the clients that I have just mentioned before, and also to grow some exposures. So the sponsored access model needs to be built to this large array of participants. And at Euronext, what we want to offer is flexibility. So buy-side clients willing to get a traditional model can access repo claiming through a general clearing member, but can also have access to this new sponsored access model, which is efficient from an operational standpoint, from a cost standpoint, from a legal standpoint, and enables clients to tap liquidity in a seamless way and risk-effective way.
Josephine Gallagher – Okay, interesting. So finally, on the topic of innovation, the market is also, you know, having to deal with new developments in DLT, T+1 settlement, as well as you know the growing electronification of the market just generally. From your vantage point, what is the next phase of development in driving these kind of efficiencies across clearing and the wider repo market as a whole?
Yama Darriet – Yeah, I think that the next step is really about increased connectivity and probably more automation. So you mentioned T+1. So it’s true that with T+1 go live in October 27 the window will be reduced to almost zero. So the value change from trading to clearing, collateral management, and settlement will need to be reduced to almost zero. So funding, clearing, collateral management, settlement will need to be fast and accelerated by default, and not anymore as an exception. Automation can be a partial answer to that, but the challenge is really about connectivity between these different layers that I have just mentioned before. I think that the real challenge for the market is to bring an infrastructure that is connected in a seamless way, from trading to clearing and settlement, and that’s exactly what we are trying to build at Euronext, right?
Josephine Gallagher – Brilliant, Yama. Thank you very, very much for joining us.
Yama Darriet – Thank you very much, Josephine.
Josephine Gallagher – I’d like to thank Yama for his insight, and of course you for watching. This has been Trader TV.
