Instimatch: Corporate cash piles can boost money market liquidity

Published on 1 May 2019

Instimatch believes its network could boost money market liquidity through three key innovations: a broader set of trading counterparties; greater cross-border counterparty discovery; and technology innovation to support the use of shorter-term instruments. Daniel Sandmeier, CEO of Instimatch, outlines his firm’s vision for a more efficient money market model.

Dan Barnes Welcome to Trader TV money markets – your insight into the trading climate for professional investors. I’m Dan Barnes. Concern around money market liquidity and transparency has increased in recent years, leading to reforms in the US market in late 2016, and the European money market fund reform in 2018. Today, we’re speaking with Daniel Sandmeier, CEO of Instimatch Global, to discuss how his firm is helping market participants to increase their access to both counterparties and liquidity. Daniel, welcome to Trader TV.

Daniel Sandmeier Thanks for having me.

Dan Barnes So why is liquidity so fragmented in money markets?

Daniel Sandmeier So trades between different countries don’t happen all too much, and on top of that, I think that money markets are very much happening between banks, but there’s very little interaction between different sectors of the financial system. So,  you see very little trading between corporates, asset managers, pension funds, et cetera. They all go through the banks so that the money market is largely dominated by banks. And that’s something where the network idea of Instimatch, where we try to break down those boundaries, first of all, on a geographical scale. So, we want to try to make a unified global market for exchange of liquidity between different institutions. We allow for on board, apart from banks, corporates, corporate treasurers, asset managers, insurance companies, large family offices, even public sector, looking for funding or looking to dispose of liquidity. In some cases, joining our network to find a much broader set of counterparties.

Dan Barnes Are there any currencies in which you find liquidity is more needed?

Daniel Sandmeier We actually do see a bit of a liquidity squeeze in the US dollar in Europe. So, there’s an imminent need for US dollars, which we’re trying to complement by actually moving into the Middle East right now and onboarding some dollar rich counterparties in the area.

Dan Barnes What effect does that fragmentation have on the market?

Daniel Sandmeier Well, I think money markets are huge. Just to give you a few numbers, I mean, the ECB reports daily volumes of up to 120 billion. And similarly, the Bank of England reports daily volumes of around 60 billion, so it’s a huge market. I’ll give you another number, Moody’s actually reports that non-financial corporates are sitting on a cash pile just under 1 trillion, so if we can increase the interaction between the counterparties and actually create a more diverse set of counterparties, that trade across geographies, which is ultimately what Instimatch’s ambition is, we create a much more liquid and better market than exists today.

Dan Barnes Will that have an effect on pricing for firms?

Daniel Sandmeier Well, I do hope so. I think price detection is a big topic. I think counterparties are actually losing out on finding the best price in the markets, which could be for a multitude of reasons. It could be because they do trade with their counterparties that are introduced to themselves and are not keen or hungry to find new counterparties. But there’s no regulatory need, there’s no need for best execution by law or regulator, right? So, they’re not forced to find the best price out there necessarily. Then again, the personal ambition of a treasurer, I feel, should be to find the best price at the best risk, of course, with the counterparty in the money market. But I think that’s the beauty of the tool. You can find a different set, a large set of counterparties with different ratings, obviously, that will show you different rates for different maturities. And the beauty of it is to meet them, get introduced to them, and actually start trading if they fit your risk reward profile.

Dan Barnes And we do see home bias in some markets, but we’re very used to equities and derivatives and fixed income being international. Is there any structural reason why it hasn’t become international?

Daniel Sandmeier I do believe it really comes very much from being introduced to certain counterparties, having KYC in place, having credit limits in place, which is two of the things you need to overcome before trading with somebody. KYC is a very important topic to the members on the network, which we try to facilitate. On the other hand, credit limits is a very individualized thing between the two counterparties where the platform cannot intervene with. But I do think the limitation comes very much from the capacity or the willingness of counterparties to actually open up to new counterparties. Between counterparties now and the willingness actually of the members onboarding platform is rather high. They’re actually really willing to get introduced to new counterparties, go through KYC, open credit limits and start trading with them, because that’s exactly what they’re after. They’re after better pricing, better counterparty detection, and they don’t mind to go across geographies and across sectors necessarily. If from a regulatory perspective they’re allowed to do, they’re more than happy to find new counterparties. That’s exactly the counterparties we’re after. We love to have new counterparties who actually enjoy the beauty of the network idea and come onto the platform and explore that.

Dan Barnes What’s the role of technology in enabling this?

Daniel Sandmeier I mean, technology is the base to it all, right? It needs to be accessible from anywhere, all around the clock. We have a cloud-based application, so you can log in from anywhere basically, and at any given time, it will be a global thing anyway. And liquidity never stops, right? So, we see this thing running ultimately 24 hours a day when we expand across geographies. I think if we think one step further, we’re moving in the direction of lock chain or more precisely distributed ledger technology. We’ve actually built the prototype already enhancing today’s money markets. The shortest time you can trade right now is overnight, due to the limitations of today’s technology. And today’s technology will not allow for any shorter periods, because simply there’s settlement periods to adhere to and settlement systems that don’t cope with higher speed. Right? So, DLT lends itself as the perfect solution. We’ve built the prototype whereby we actually do want to and will be providing a service to borrow and lend money intraday. So intraday liquidity is a big topic, not just on our end, but in particular from regulators’ point of view or the Bank of England. The ECB have made it very clear that since global, systemic banks will have to adhere to a certain set of rules and manage intraday risk and manage intraday liquidity, and the beauty of technology is simply as an enhancer and enabler of that. It takes away the old fashioned way of doing it which should have been replaced after the financial crisis. Let’s face it. I mean, we know about the inefficiencies of money markets and the lack of liquidity and the immediate drop of liquidity and trust between financial institutions. And 2008 was there in a blimp, like it was gone in a second and nobody wanted to borrow or lend money to or from each other anymore. I think that’s the beauty of the network. I’m obviously hoping that shouldwe have another incident, that there will still be counterparties quoting and trading on the platform. But I mean, in the old world it was simply not possible anymore.

Dan Barnes Daniel, thank you.

Daniel Sandmeier Thank you, Dan. Thanks for having me.

Dan Barnes I’d like to thank Daniel Sandmeier of Instimatch Global, and of course you for watching. To catch our monthly reports on other markets, or to subscribe to our newsletter, go to TraderTV.NET.