Repo - Is it time for a centre of excellence?
03 September 2019
Pirum Systems’ Scott Brown explores why the securities lending market has enjoyed wide-spread adoption of automation but the post-trade space for repo has been much slower
Image: Shutterstock
The securities finance market has heard many times how securities lending has led the way in post-trade automation and how real-time visibility on economic differences leads to improved accuracy in profit-and-loss and a reduction in month-end issues and corrections.
Within capital markets there are many centres of excellence around the world at an institutional level, but how much of this occurs at the industry level and what benefits can this provide?
At Pirum, we provide a centralised automation hub for the securities finance market that brings together industry practitioners, and we have seen how crucial this has been to the growth and evolution of the market. The level of participation varies greatly between securities lending and repo, where the story differs somewhat: 71 percent for securities lending versus 29 percent for repo (by USD value). For the majority of sell-side firms, the adoption of electronic trading (or automatic trading system) is a growing trend (see figure 1) and where the resulting trade is cleared or collateralised via triparty (broker-to-broker) the straight-through processing (STP) flow post execution is at times very efficient. Where a trade is not cleared, or the collateral is managed bilaterally, the STP flow post-execution is varied.
One of the contributing factors to the STP rates could be the disparate nature of the repo market as a source of liquidity. Unlike securities lending, the source of liquidity is not finite. Because of this, some of the market reconcile and manage their trades on a central vendor solution and some do not. This leads to banks and brokers using multiple platforms and solutions, often with varying degrees of efficiency and cost, which adds considerable complexity. If this is to change then the market needs a place to begin, such as with something similiar to what Pirum brought to the securities lending market 18 years ago. A natural selection for automation that brings all sides of a repo transaction together. Introduce a regulatory paradigm shift such as Íø±¬³Ô¹Ï Financing Transactions Regulation (SFTR) and suddenly the current model appears clunky.
Many of the counterparts to the sell side are hedge funds or mutual funds, who historically have in-house solutions for processing and reconciling their repo deals, due largely to volumes being low and the fact that the vendor solutions are often priced with volume bandings, making some solutions too expensive. However, this means that those firms don’t take advantage of central reconciliation or benefit from economies of scale.
SFTR brings additional challenges to the repo business, that until now have not been a focal point for firms. In particular, unique trade identifier (UTI) creation and distribution where clients are not using a post-trade platform or where a platform does not have counterparty critical mass will be hard to solve for. Pirum and IHS Markit provide a facility to create and share UTIs for our clients. It has the ability to absorb UTIs provided to us by our clients and potentially from another platform. However, for structured or non-vanilla repos the industry has challenges to overcome, such as how multiple substitutions are treated and where pledge arrangements are being utilised.
One thing is for certain: legacy trade booking practices will need to adapt to suit the requirements of the regulation, meaning trades booked under a global master repurchase agreement will need a common industry approach to how firms treat lifecycle events (or modifications). For example, repo trades reconciled with rebate style securities lending trades will no longer qualify a match once the trade is submitted to the trade repository.
All of this considered, there are solutions that are readily available to repo practitioners today that provide automation for existing processes. These include the following:
• Real-time confirmations and affirmation of trades
• Real-time pre-matching of key economics and SSIs
• Real-time reconciliation of life-cycle events e.g. rate changes
• Real-time fails management
• Auto-returns for processing borrow returns in an STP manner
• Triparty required value automation and real-time visibility of allocations
• Central counterparty connectivity (for deals novated post execution)
• Given many repo desks also have a component part of their flow business that are bond borrow trades, providers such as Pirum can offer full-lifecycle automation and STP rates for mark-to-markets and returns in the 99 percent and 97 percent range respectively.
Achieving standardisation and process automation will become of paramount importance in 2020, not only when SFTR takes effect but also the introduction of the Central Íø±¬³Ô¹Ï Depository Regulation (CSDR), which will put a greater emphasis on firms ensuring that they monitor and manage fails in a timely fashion. If you are not entirely familiar with the scope of CSDR, Pirum wrote a detailed CSDR overview in the International Íø±¬³Ô¹Ï Lending Association’s March securities lending report, which gives a detailed look into what firms can expect from the regulation.
Along with process automation, clients can also benefit from enhanced visibility on their collateral usage/potential usage. Clients can identify where assets can be deployed quickly, allowing for faster trading decisions and an improved use of inventory while managing usage with digitised collateral schedules.
In a marketplace where costs, spreads and resources remain squeezed, firms require strong partners to act as industry utilities and help clients achieve efficiencies and economies of scale that only a centralised solution can offer.
As we have seen in other products such as cleared derivatives and securities lending that standardisation has been achieved with the help of vendors who have taken steps to manage commoditised functions across the market, allowing firms to focus on alpha generation. Íø±¬³Ô¹Ï lending has largely achieved this, and the repo market would benefit from a similar approach. In a world that is sharing more than ever, now is the time for the repo market to draw lines where there are dots, and make sure that more of the market is connected in the post-trade space. At Pirum we’re working closely with the repo market to assist clients on this journey.
Within capital markets there are many centres of excellence around the world at an institutional level, but how much of this occurs at the industry level and what benefits can this provide?
At Pirum, we provide a centralised automation hub for the securities finance market that brings together industry practitioners, and we have seen how crucial this has been to the growth and evolution of the market. The level of participation varies greatly between securities lending and repo, where the story differs somewhat: 71 percent for securities lending versus 29 percent for repo (by USD value). For the majority of sell-side firms, the adoption of electronic trading (or automatic trading system) is a growing trend (see figure 1) and where the resulting trade is cleared or collateralised via triparty (broker-to-broker) the straight-through processing (STP) flow post execution is at times very efficient. Where a trade is not cleared, or the collateral is managed bilaterally, the STP flow post-execution is varied.
One of the contributing factors to the STP rates could be the disparate nature of the repo market as a source of liquidity. Unlike securities lending, the source of liquidity is not finite. Because of this, some of the market reconcile and manage their trades on a central vendor solution and some do not. This leads to banks and brokers using multiple platforms and solutions, often with varying degrees of efficiency and cost, which adds considerable complexity. If this is to change then the market needs a place to begin, such as with something similiar to what Pirum brought to the securities lending market 18 years ago. A natural selection for automation that brings all sides of a repo transaction together. Introduce a regulatory paradigm shift such as Íø±¬³Ô¹Ï Financing Transactions Regulation (SFTR) and suddenly the current model appears clunky.
Many of the counterparts to the sell side are hedge funds or mutual funds, who historically have in-house solutions for processing and reconciling their repo deals, due largely to volumes being low and the fact that the vendor solutions are often priced with volume bandings, making some solutions too expensive. However, this means that those firms don’t take advantage of central reconciliation or benefit from economies of scale.
SFTR brings additional challenges to the repo business, that until now have not been a focal point for firms. In particular, unique trade identifier (UTI) creation and distribution where clients are not using a post-trade platform or where a platform does not have counterparty critical mass will be hard to solve for. Pirum and IHS Markit provide a facility to create and share UTIs for our clients. It has the ability to absorb UTIs provided to us by our clients and potentially from another platform. However, for structured or non-vanilla repos the industry has challenges to overcome, such as how multiple substitutions are treated and where pledge arrangements are being utilised.
One thing is for certain: legacy trade booking practices will need to adapt to suit the requirements of the regulation, meaning trades booked under a global master repurchase agreement will need a common industry approach to how firms treat lifecycle events (or modifications). For example, repo trades reconciled with rebate style securities lending trades will no longer qualify a match once the trade is submitted to the trade repository.
All of this considered, there are solutions that are readily available to repo practitioners today that provide automation for existing processes. These include the following:
• Real-time confirmations and affirmation of trades
• Real-time pre-matching of key economics and SSIs
• Real-time reconciliation of life-cycle events e.g. rate changes
• Real-time fails management
• Auto-returns for processing borrow returns in an STP manner
• Triparty required value automation and real-time visibility of allocations
• Central counterparty connectivity (for deals novated post execution)
• Given many repo desks also have a component part of their flow business that are bond borrow trades, providers such as Pirum can offer full-lifecycle automation and STP rates for mark-to-markets and returns in the 99 percent and 97 percent range respectively.
Achieving standardisation and process automation will become of paramount importance in 2020, not only when SFTR takes effect but also the introduction of the Central Íø±¬³Ô¹Ï Depository Regulation (CSDR), which will put a greater emphasis on firms ensuring that they monitor and manage fails in a timely fashion. If you are not entirely familiar with the scope of CSDR, Pirum wrote a detailed CSDR overview in the International Íø±¬³Ô¹Ï Lending Association’s March securities lending report, which gives a detailed look into what firms can expect from the regulation.
Along with process automation, clients can also benefit from enhanced visibility on their collateral usage/potential usage. Clients can identify where assets can be deployed quickly, allowing for faster trading decisions and an improved use of inventory while managing usage with digitised collateral schedules.
In a marketplace where costs, spreads and resources remain squeezed, firms require strong partners to act as industry utilities and help clients achieve efficiencies and economies of scale that only a centralised solution can offer.
As we have seen in other products such as cleared derivatives and securities lending that standardisation has been achieved with the help of vendors who have taken steps to manage commoditised functions across the market, allowing firms to focus on alpha generation. Íø±¬³Ô¹Ï lending has largely achieved this, and the repo market would benefit from a similar approach. In a world that is sharing more than ever, now is the time for the repo market to draw lines where there are dots, and make sure that more of the market is connected in the post-trade space. At Pirum we’re working closely with the repo market to assist clients on this journey.
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