Using electronic platforms to correct the broken repo market.

Published on 26 October 2018

Roelof van der Struik, manager for Treasury Trading & Commodities at PGGM says the repo market is broken; he tells us how the Dutch pension fund manager is using electronic platforms to correct the broken repo market.

At the same time (from 06.36), the Securities Financing Transaction Regulation (SFTR) promises to severely impact market efficiency yet Tom Harry, Product Manager at MTS and Steve Holland, SFTR Product Manager, UnaVista believe that SFTR will strengthen buy- and sell-side relationships.

Dan Barnes Welcome to Trader TV Fixed Income – your insight into the trading climate for professional bond investors. I’m Dan Barnes. Securities lending and repurchase agreements are crucial tools for managing liquidity for the buy- and sell-side. In October’s show, we’re talking to Roelof van der Struik, manager for Treasury Trading & Commodities at Pension Fund PGGM about his firm’s efforts to deliver greater efficiencies in its securities financing operations. Tom Harry of MTS, and Steve Holland at UniVista, about the impact that securities financing transaction regulation will have upon securities financing and ultimately upon investors. Roelof, welcome to Trader TV.

Roelof van der Struik Thank you for having me Dan, good morning as well.

Dan Barnes Tell me, while are repo and securities lending so important for your investors?

Roelof van der Struik For you to finance has two functions within PGGM, because lending is mostly seen as incremental income for our fund, and repo is often seen as a way of bridging between liquidity and creating liquidity in the market when needed.

Dan Barnes And where are asset manager is currently exposed to risk in their securities financing operations?

Roelof van der Struik The market is broken. It sounds very dramatic and in some ways it is. The regulation and fiscal policy, the banks can no longer fulfill the role that they used to fulfill in market making and providing liquidity to the market. This becomes painfully obvious during certain regulatory reporting dates like end-of-year and end-of-quarter, especially end-of-year where the repo markets closes down completely. And this, of course, has caused major problems.

Dan Barnes And how has PGGM been working then to manage those risks?

Roelof van der Struik We used to have a repo book of nearly 12-14 billion euros at any certain time. But as we can no longer bring those funds over year-end in the repo product, we have had to scale down our repo book, which means now we only have a book of about 3-4 billion euros.

Dan Barnes And are you working with the sell-side firms to try and increase the efficiency of the market in the way you are able to work?

Roelof van der Struik I think what we are figuring out is that we are going to have to develop more of our own plumbing and create liquidity in places where it isn’t effected by the bank balance sheet, so we have recently started quite a large project called ‘Collateral Roadmap,’ and within this project, we have identified certain ways that we can get back some of the liquidity that we’ve lost over the past years. The first initiative that I led was clear to do the lending. We have become a direct member to the Eurex CCP and we went live with that this summer. We still have some teething problems, but we are tackling those at the moment, and it’s all looking good, but we’re also going to play  at repo with Eurex, and that’s at the moment the implementation. But it does mean that we have to create some of our own plumbing and connect to certain providers in each country. It’s quite a lot of investment and work, but I would say that by the end of next year, we should really be seeing the fruits of what we are doing at the moment.

Dan Barnes Over time, what sort of benefits do you think you’re going to realize?

Roelof van der Struik Well, I think first of all it’s not a benefit, but it’s fixing what was broken. It’s the regulatory framework that we’re working at the moment, so it’s bringing us back into the same position we were before we were faced with the market, which is not functioning as it should be.

Dan Barnes How will this affect end investors ultimately?

Roelof van der Struik If there’s going to be a crisis or there’s gonna be an event, let’s make sure it’s not at year-end, because if that happens, then I think the fertilizer will definitely hit the air conditioning in a big way, as they say.

Dan Barnes Is it fair to say the market needs to see greater electronic trading and plumbing initiatives to enhance efficiency?

Roelof van der Struik Absolutely, and there are some other initiatives as well, of course. At the moment we have quite a few peer to peer initiatives in the market. We are looking into them as well, but we have decided to first go the CCP route. The reason being is that would seem more like the route that the regulator wants us to go.

Dan Barnes Do you think the regulatory awareness of the challenges in the market structure, do you think the awareness is there of the seriousness of the problems?

Roelof van der Struik I once spoke with on the panel with from a lady from the ECB and she said, on average, liquidity is good. And I said, yes, I could be dead in 10 minutes, but on average, my heartbeat for the year would be perfect. I think that’s the situation we’re in. I mean, on average, everything’s fine, but as I said, the year-end, the quarter-end, liquidity in the market is problematic at best. Don’t forget, in times of normal market conditions, no well-rated party wants cash. But again, when the fertilizer hits the air conditioning and nobody wants bonds, everyone wants cash. There needs to be some method of transforming between those two.

Dan Barnes Roelof, thank you very much.

Roelof van der Struik It was my pleasure. Thank you for having me.

Dan Barnes Now we’re going to speak with Tom Harry at MTS and Steve Holland at UniVista, about the impact of securities financing transaction regulation will have upon investors. Tom, Steve, welcome to Trader TV.

Both Thank you.

Dan Barnes So, Tom, can you tell us to start with what is securities financing?

Tom Harry Well, very broadly speaking, securities financing covers the borrowing or lending of a security for cash or vice versa. It is really difficult to understate how important securities financing is. Today’s financial system would not exist without it. Fx market makers rely heavily on borrowing securities through securities financing, when they don’t have a security in the inventory. And many institutional investors lend that surplus cash and securities to enhance their returns. So very clearly, it’s a very important function in today’s financial system.

Dan Barnes So where are there barriers to enhancing the efficiency within the securities financing team and the trading team?

Tom Harry Given the the complexity of the characteristics of the different contracts and the legals available for the securities financing transactions, and then the lifecycle events often have to be managed, such as the margin provision and collateral management. This has resulted in a large number of bespoke systems and manual processes, which naturally leads to inefficiency and can erode the benefits of securities financing. But this is part of the reason why initiatives such as MTS Repo have come into being. MTS Repo having been around for 20 years, partly to address some of these issues and to provide electronic trading solutions and straight-through processing to mitigate some of the inefficiencies that have arisen.

Dan Barnes Are there any sort of regulatory barriers or regulatory developments which might impact efficiency in the markets?

Steve Holland The next big regulation everyone’s on everyone’s agenda is SFTR, which is going to be the regulation to to make securities financing transactions reportable to the European regulators. It’s going to be a big change for the industry, because currently they don’t have any reporting regime at all. They also, you know, these are often done by multiple teams within a bank or multiple systems, so it’s going to be a big change for those people, to get their data reporting in order for when this goes live in Q1 2020.

Dan Barnes If SFTR is going to enhance transparency, that’s presumably a positive for the industry?

Steve Holland Yeah, I mean, we saw obviously in the crash in 2008 that the position of people like Lehman Brothers was massively underestimated, and most of that was due to the securities finance transaction that they’d entered into with their counterparts. So making that more transparent to regulators will mean that in the future, that’s less likely to happen and everyone will know the positions before something like that could happen again.

Dan Barnes And are there risks that it might create?

Steve Holland Yeah, there are some risks. Obviously, they’ve never had to report those transactions before, and there’s a lot of data that the regulators are asking for, that not all parties that have to report necessarily have at this moment in time. And so they’re going to have to do a lot of work to either create or model those data fields, or get them from other areas or other counterparties, for them to be able to report. So, it’s going to be a big undertaking I think for firms.

Tom Harry I think it’s very important to also recognize that there is a potential opportunity for firms to finally recognize the complexity of this function, and to bring greater linkages between their systems to achieve greater integration and therefore to realize greater returns. You know, it’s partly thanks to the work that they do alongside getting ready for SFTR reporting.

Dan Barnes And how do you see firms managing the process at the moment?

Steve Holland It’s a big undertaking. I think the thing to also remember is that a lot of firms and we’ve seen this in the past, with EMIR and MiFIR, they tried to get their reporting sort of perfect, but forget the reason why they’re doing it. So, you know, the regulators, we understand, don’t want to see a perfect example of reporting. They want to see books of record data, warts and all. They don’t want it sanitized. So it’s important to remember that it’s not just reporting for the sake of reporting. It’s to give a clear position of your books of record on a daily basis.

Dan Barnes Pulling all that together, it sounds like there are a number of challenges in aggregating that sort of data and making it useful.

Steve Holland It’s over 150 fields of data, which a lot of firms don’t have all of these fields, so they’re going to have to look at either getting that data from counterparties, etc., or in terms of a lot of them is the reused data, so the reuse of those securities, they don’t necessarily track it in the way that the regulator wants it reported. And so they’re going to have to either model that data or come up with a way of tracking that, and that’s going to be quite, we’ve seen through the industry groups that there’s quite a lot of discussion about how that’s done, because if everyone does it in a different way, then the data will be all over the place. So, it’s important that the market comes together and agrees on how these fields and how this data will be calculated, modeled, etc.

Dan Barnes How do you think that SFTR might impact the sell-side to  buy-side relationship?

Tom Harry It’s a very good question. Today the D2C market, especially for repos, is one that’s very manual. That’s still very much over the phone or done by chat. And I think SFTR is going to be the item that really pushes this market towards the electronic space, because the need to ensure that you report correctly, in addition to the need to achieve greater efficiencies, will really make electronic trading in the D2C space a lot more appealing. And certainly that’s something that we have started to notice with our D2C offering GCM, where we’re starting to see a lot more traction interest, thanks to SFTR and thanks to the efficiencies that electronic trading provide.

Dan Barnes Steve, Tom, thank you.

Both Thank you.

Dan Barnes I’d like to thank Roelof van der Struik from PGGM, Tom Harry from MTS and Steve Holland at UniVista, for their insights into how to drive efficiency in securities financing, and of course, you for watching. To catch our monthly reports on other markets or to subscribe to our newsletter go to TraderTV.NET.