Enrico Bruni

Securities finance is on the verge of a breakthrough in terms of the electronic trading of repo, as Tradeweb’s Enrico Bruni tells Mark Dugdale

Would it be fair to say that the repo market has seen little electronic innovation to date?

Yes, it is really only the dealer-to-dealer repo business that has traded electronically to date, even though repo is a high volume, low margin business, and therefore seemingly well suited to an electronic solution. Client repo flow has been very manual and inefficient, with transactions between the buy and sell side typically executed via messaging. This trade flow is time-consuming, fragmented, error-prone, lacking proper audit trails and, some would argue, has become uneconomic.

It is worth noting that most dealer-to-client interaction involves provision of repo rates and additional haircuts, which further compounds the manual process for dealers and clients in the collation and comparison of quotes. It is only now that we are seeing significant pressure on the existing dealer-to-client interaction to move to an electronic solution.
Why is repo trading becoming more electronic now?

Following the global financial crisis, many factors have come into play, which are driving dealers and clients to look for an electronic solution for repo trading, including regulatory and reporting requirements, proof of best execution, and fewer resources at traditional liquidity providers. Moreover, post-financial crisis initiatives such as the new margin requirements for non-centrally cleared over-the-counter derivatives introduced by the Basel Committee on Banking Supervision and the International Organization of Securities Commissions, as well as increased liquidity buffer requirements under Basel III, have led to a growing need to efficiently access and manage collateral.

Buy-side clients are facing increasing pressure to prove best execution, and to optimise the performance of their portfolios. On the sell side, firms have fewer resources at hand and are looking for efficiencies in order to sustain the business. For instance, trading desks have seen significant reductions in risk limits and balance sheets post-financial crisis and as such, have had to focus on conducting profitable business with key customers in the most efficient manner.

Headcount reductions on the sell side have also led to a search for solutions to focus on operational efficiency. In fact, a number of trading desks now see the lower margin, commoditised client business as inefficient, and many are looking to reduce their footprint in this space, unless the existing uneconomic, error-prone and manual trade flow can be streamlined.

Historically, the resource-heavy, manual nature of repo market interaction has meant that it has been unviable to fully mobilise all managed portfolios in repo. Furthermore, significant resources required by market participants to transact in the repo market have acted as a barrier to entry. However, the arrival of a less resource-intensive method of transacting is changing that dynamic.

Why does repo matter and why is Tradeweb moving into repo?

The global financial crisis saw decreased reliance on unsecured money markets by both banks and non-banks, and a move to the security of collateralised transactions that repo provides. In addition, with large central bank bond buy-back programmes in place, real money accounts are increasingly entering the market as providers of collateral, while other entities are now looking to the repo market to access collateral to post as margin on non-centrally cleared derivatives.

Participants are, now more than ever, looking to execute and process this increased collateral trade flow efficiently, using electronic platforms. Tradeweb’s electronic dealer-to-client repo platform leverages the company’s proven credentials in this space to provide a robust and efficient solution for buy-side and sell-side alike.

What is the Tradeweb model? What are the benefits of RFQ?

An electronic request for quote (RFQ) model with integrated straight-through processing (STP) was the obvious choice for Tradeweb. An RFQ model provides liquidity that no other model provides. Our dealer-to-client RFQ platform, launched in February 2016, captures all the efficiencies of electronic execution, while allowing dealers to identify balance-sheet-efficient-trades, and use fewer resources. It allows dealers to see in the pre-execution stage the balance sheet impact of client trades they are potentially taking on.

The sell side sees the benefits of significantly reduced manual ticket production and input, and sales people have greater time to devote to client relationships and executing higher margin repo trades.

Buy-side clients have also seen substantial time savings and increased productivity, particularly those clients with significant numbers of sub-accounts now configuring their trade flow to send inquiry at the sub-account level. This helps reduce the workload even further by removing the passing of trade splits, which can be error-prone and labour-intensive for both counterparties.

Why trade repo with Tradeweb?

Tradeweb allows buy-side firms to fulfil their repo strategy by allowing management of the repo flow at the sub-account level, which enables dealers to see splits pre-trade, and avoid time-consuming post-trade manual splits. We provide an audit trail and enable swift and efficient comparison of dealer responses, taking into account dealer rate and haircut to prove best execution.

Also, Tradeweb gives dealers a pre-execution view of the balance sheet impact of client trades, which in theory, should deliver better pricing. Additionally, we provide robust pricing for repo start prices through integration with our market leading bond marketplace. We also allow dealers to see the balance sheet impact of what they are pricing on an end-date netting basis, as well as offering a variety of flexible pre- and post-trade integration solutions.

Where will the market be in a year’s time?

Recent macroeconomic events and regulatory changes have been the catalyst for change. Generally, we see a wide range of assets moving trading to electronic venues, and repo trading would be no different. In addition to that, new central counterparty initiatives that expand participation in the repo market are driving further adoption of e-trading, as they require electronic interfaces to execute and book trades. We feel that we are on the verge of a breakthrough in terms of the electronic trading of repo.

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