Fixing the repo market while the sun is shining

Published on 18 December 2019

The repo markets are a marked cause for concern amongst market participants, regulators and central banks today. They offer a route for generating returns on assets, sourcing collateral and providing short-term liquidity, however, recent disruptions have raised the levels of concern around liquidity shortfalls and price spikes, creating a structural challenge for market participants on the buy- and sell-side.

Oliver Clark, global head of product at MTS and Tim Martins, product manager for repo and money markets at MTS, see electronic trade execution as a route to a marked improvement in price and liquidity discovery, but they warn that buy-side firms should adopt these new trading protocols ahead of the next event to avoid unnecessary risk.

Dan Barnes Welcome to Trader TV, your insight into the trading climate for professional investors. I’m Dan Barnes. Inefficiencies in the repo market create unnecessary operational headaches for buy- and sell-side traders. I’m speaking with Tim Martins, head of product for repo and money markets at MTS, and Oliver Clarke, head of product at MTS, to discuss how the right protocols and processes can deliver more effective trading and ultimately better returns to investors. Oliver, Tim, welcome to Trader TV.

Tim Martins Thanks Dan.

Oliver Clarke Good morning. Thanks for having us.

Dan Barnes So, Oliver, how important is the repo market to buy-side firms today?

Oliver Clarke You need to consider each buy-side firm in its category, because each buy-side firm will have slightly different requirements, whether it’s simply to invest cash, whether it’s to manage a portfolio of bonds, if it’s a central bank, perhaps to lend QI bonds back into the street and then reinvest that cash in a neutral fashion. So, from a vendor perspective, we have conversations with buy-sides from all of these categories I’ve just mentioned.

Dan Barnes Have liquidity disruptions been increasing?

Oliver Clarke I think since 2008, there’s been a number of disruptive factors within both the European and the US markets. More recently in the US, there was a significant disruption to liquidity. Where we operate in Europe, I think, the sterling markets have perhaps been impacted more than the euro markets. There was a significant period where the access to sterling liquidity was difficult for certain asset management firms. The repo market was not as liquid in guilds as they would have liked. I think,  that liquidity has perhaps improved over the last couple of years. Certainly from our perspective, as a trading platform, we are having frequent conversations with buy-side at the moment about fixing the roof while the sun is shining, perhaps rather than waiting for the next crisis and disruption.

Dan Barnes How would you characterize execution quality in repo markets today?

Tim Martins I think the key thing is for the repo markets, the execution quality is not just measured on price. It’s quite unique in that actually access the balance sheet is possibly as important or more important than price and an outright level. We facilitate, for instance, the buy-side are able to to trade behind the best price, in order to get the full size done, potentially. So, I think that it’s your metrics are very different as a buy-side. You’re looking to fund your whole portfolio. You’re looking to really kind of access, consistently, funds. And actually sometimes that means, that in order to get the best execution, you’re looking to build on the relationships that you’ve got with your dealers and you’re looking to trade in a consistent way.

Oliver Clarke You can see that reflected against the interdealer market, which is more commoditized, more standardized, more liquid cleared, where you don’t really see the same spikes and disruptions to the liquidity over a certain year-end, for example, a month- and quarter-end. You may see some year-end even in the interdealer market, you may see some spikes. And that, compared to access to liquidity and balance sheet for buy-side, it’s really a much more mature market. So, I think if you can increase the efficiency in the D2C space, then you’ll increase the access to liquidity and the reliability of that access to balance sheet.

Dan Barnes And you mentioned there are different metrics to measure execution quality. Could you sort of give us a deep dive into execution quality and how that might be assessed?

Tim Martins Again, how to assess. I think, when you’re assessing your execution quality, you’re really assessing prices that you as a buy-side are getting from different dealers. I think that it’s hard to benchmark yourself against the market, because there isn’t, you know, a level market. The prices you have for one-day, CCP-settled trades, that go through our interdealer market, are very different to the prices that are being shown to clients, because there’s obviously the dealers have to consider credit risk, balance sheet impact. And so actually benchmarking as a buy-side against the interdealer market is almost an irrelevance. I think really you’re looking at, you know, your access to balance sheet versus your pricing versus your dealers, and really having to assess it that way.

Oliver Clarke Yeah. I mean it absolutely makes sense. And I think that’s one of the problems that we’ve been trying to solve with our D2C trading platform, because it gives you access to direct streaming access, let’s say, from your counterparty dealers. So, your dealers who are acting in the clear market that you can’t access, are able to stream tiered and precisely measured prices to you as as a counterparty. So, as a buy-side for the first time, you do get free trade information. You do get indicative flows that indicate where a special bond or GC happens to be trading on any particular day. So, you have that free trade information to inform your trading and to choose your your counterparty of choice, and also to enrich your post-trade information, and to provide a certain amount of best execution, let’s say. And alongside that is access to certain daily bulletin information coming from the interdealer market as well.

Tim Martins I think it’s interesting to note the variation in how different buy-sides interact with the platform. You’ll have buy-sides who are essentially saturating their credit line exposure with all of their bank counterparties. Now for those guys, what’s important is to keep those balances in place, to keep access to that balance sheet and to kind of roll those trades. So, they’re not looking to come onto a platform such as ours, and suddenly start spreading their request for quotes out to a whole raft of dealers. They’re looking to use it as an efficiency tool. And for that respect they get the SDP peace, SFTR-reporting availability. So, it’s more of an efficiency tool in that respect. For other buy-sides, they are looking really to go out and to search for the best price. And, you know, they have that leverage within the street.

Oliver Clarke And the network of participants as well.

Tim Martins So, yeah, exactly, and we give them that tool to be able to actually efficiently put out that inquiry to a wider range of people.

Oliver Clarke The BondVision Repo platform sits as part of a multi-product platform. So you’ve got cash, bond, rates, credit products on there as well. So for a buy-side interacting with BondVision, you have the familiarity, but you also have the pretty established network there to build on. You may already be trading on on the rates side, so you can use that cash information to inform your repo trading as well, from that single front-end software.

Dan Barnes Oliver, Tim, thank you very much.

Oliver Clarke Thank you.

Tim Martins  Thank you.

Dan Barnes I’d like to thank Tim Martins and Oliver Clarke and of course, you for watching. To catch up with our shows on other markets or to subscribe to our newsletter, go to TraderTV.NET or ETFTV.NET.