SUPPLIER AND TECHNOFIN®

Triparty Repo Markets – it is time for the Next Generation

Saheed Awan, Director of Global Securities Financing at the industry-leading Triparty Repo service provider Clearstream, explains the coming evolution of market developments.

‘To boldly go where no man has gone before’ may just be the grandest phrase ever used to introduce a TV programme and it certainly rivals any of today’s corporate mission statements.

But common to the ground-breaking world of Star Trek and the modern Repo securities markets is the core aspect of the human desire to explore unknown boundaries. It is this human desire to stretch the limits, to ‘push the envelope’ or to outperform all others that drives the markets today and the infrastructure providers that serve them.

If you were to have the opportunity to ask the founding fathers of the Eurobond markets what their views were at the time, what would be the 21st century developments of the Repo markets? – They would look at you very strangely indeed as though you were a Klingon or had pointed ears.

In fact, just ten years ago European repo activities were still infantile. Today’s volume figures show significant progress with International Capital Market Association’s latest figures putting the value of the market at Euro 5.8 trillion.

Over the last decade, the market has seen new entrants, new products and wider asset coverage and today people are willing to discuss investment grade, non-investment grade, equities and even loans.

Another feature has been the growing realisation that this is not just an opportunity to finance assets more effectively but a real revenue-generating opportunity.

Today the reality is that in 2006, 40 years on from the first Eurobond issue, around 60 to 70 percent of Fixed Income settlement relates to repo and collateral management transactions.

This fact shows better than any other that there has been a generational change within the industry since those early days. But as with all generations, there is always the next one coming.

Today, we are at that moment again. This next generation will bring new and innovative elements, new markets and new services which will take the market to a place it has never been before.

As the next generation appears it will be both profound and universal in nature. So what is this market changing moment in history?

With Basle II approaching like a stray meteorite, and the current levels of illiquidity placing a stranglehold on the triparty financing market, Clearstream is about to launch a collateral re-use service that promises to transform what we know today.

This breakthrough will overcome the problems of illiquidity by commoditising the standard service into baskets of fungible securities.

The re-use service is truly a ‘state-of-the art Collateral Re-use’ Service that will allow Collateral Takers to re-use securities received in Triparty transactions to collateralise other Triparty transactions.

This is a significant breakthrough as this possibility has never existed before for Triparty Repo. Furthermore, the re-use will be possible across all Triparty Collateral Management Services including Triparty Repo, Triparty Securities Lending and Triparty Collateral Management with multiple re-use even possible.

This will mean that Triparty finally becomes a truly liquid product for cash providers and it fair for all to expect a massive increase in mobilising all assets for potential use as collateral. 

Clearstream has built an industry-leading position as recognised by this magazine in its second Annual Repo survey by continuously investing and delivering innovative new services.

This leadership position will be extended by further investment in the re-use service area coupled to the legal framework for collateral and in particular ‘pledged securities’ now enshrined in Luxembourg Law making it the most advanced environment for collateral management in the world, surpassing the US and all other European markets.

The question all players must ask themselves is how will this change my world? What will it mean to me and more importantly my trading book? What about my internal structures – what changes may be required? But the most critical question of all is ‘How can I turn this into a competitive advantage for me?’

As the change begins to take shape, dealers will realise that they must focus on specials and not normals as the commoditisation process leads to a level of automation not seen before.

With spreads at all time lows at as little as 2 basis points, it is increasingly difficult to cover the costs of a Repo dealing desk and this drives a need to automate wherever possible.

The basic change will be likely drive a process of pooling within the internal structures of banks. The focus will be to centralise collateral to make it more available for‘re-use’.

This in turn creates improved collateral availability due to increased efficiency in use of trading and collateral assets and will provide dealers with additional growth opportunities.

Clearstream’s model is one based on three key elements that position it ahead of all others. Firstly, the investment made in the superior technology of the new ‘CmaX’ system represents a new breed of technological excellence in the collateral management industry.

Secondly, as mentioned, the new Luxembourg Law for collateral creating a world class legal framework for pledges securities. Thirdly and probably most importantly, the Clearstream model is open, in fact wide open to enable collateral from domestic markets to be utilised like no other models does.

The Clearstream model enables the fundamentally important possibility to keep collateral at the market of its choice and not require any movements. The model allows use the collateral cross-border, across different trading, clearing and settlement systems irrespective of ownership structures.

Hence this delivers optimal usage of diverse collateral pools, held at different markets, across a range of counterparty exposures. In effect, to open a collateral universe like never before.

New Markets

But just as with the stars above us, the Repo universe is itself changing. As we see the industry develop, we see new types of players emerging in geographical terms from countries such as India and China, but also a rise in interest for the sector from new players such as Hedge Funds and there is growing interest from insurance companies, local authority treasurers and corporate treasurers.

These market forces will drive the Repo sector to address new asset types and to extend the coverage of emerging market bonds. There is the likely development of unsecuritised asset types including property being involved – and the days are numbered before we see property repo.

So whilst some may say that the bread and butter of the industry is disappearing, the truth of market development unveils that there are new markets appearing for those willing to work on specialist deals.

To accommodate such change, there needs to be a truly universal collateral management infrastructure capable of addressing all known, and probably some unknown possibilities.

With such a force of change now apparent in the industry, it is quite right to regard this period as a moment of generational change. With market volumes peaking month after month and an array of new services being pioneered by Clearstream to further boost the market, now is the time more than ever before for the captains of the Starship Repo to collectively give the command, “Warp speed ahead”. Let’s enjoy the ride.

Saheed Awan, Head of Product Management Global Securities Financing, Clearstream Banking

Luxembourg          +352-243-36868
London                +44-(0)20-786 27626
Frankfurt             +49-(0)69-2 11-1 72 50
Dubai                  +825-2530-7411
Hong Kong           +9 71-4-331-0644
New York             +1-212-309-8882

e-mail address: gsf@clearstream.com

Entry Filed under: SUPPLIER AND TECHNOFIN®, Bond Market, Clearing and Settlement, Forex Strategy, Repo, Securities