Authored by Camille McKelvey, Head of Match Strategy at Trax, and Laura Craft, Director of Securities Strategy at Traiana
The financial crisis of 2008 and ensuing waves of regulation have led to significant changes in the global Repo market. Traditionally an inter-dealer market, this key lending tool has become one of the biggest casualties of the Basel III capital rules. According to the latest International Capital Markets Association (ICMA) survey, the volume of Repos and reverse Repos outstanding in the European market shrank in size by 21% between June 2007 and December 2015.
In response to Basel III placing constraints on dealer balance sheets by imposing capital adequacy requirements, the buy-side have increasingly stepped into this market, with pension funds and hedge funds using Repo as both a funding mechanism and an alternative use of collateral, seeking to gain returns in time of historically low interest rates. Additionally, regulatory challenges are forthcoming, including the Securities Financing Transaction Regulation (SFTR) and the Central Securities Depository Regulation (CSDR), impacting all market participants. Thus, as the buy-side increasingly becomes a more active participant in the Repo market and greater regulatory hurdles persist, it has become evident that this traditionally manual market is in need of an efficient and automated global STP processing tool. In order for the industry to be compliant with the new regulatory landscape, significant change is needed in the middle and back offices across both buy- and sell-side firms.
SFTR is expected to come into force in mid- to late 2018, obligating investment firms and banks to report their Securities Financing transactions to a trade repository, increasing the focus on accurate data quality. Also in 2018, CSDR will enforce penalties for all trades failing to settle in Europe, making it even more important for trades to match accurately and in near real-time, as close to the point of trading as possible.
At Traiana and Trax, we have been working together to offer the industry an interoperable Repo matching service to support efficient, automated, operational processes and to reduce risk and cost. The service provides near real-time Repo matching for dealers and clients and creates an expanded global community of matching counterparties through an electronic Repo matching service operated by Trax. Having recognised the need for an industry standardised protocol, the service pioneers the common FIX protocol language for the Repo market. Traiana and Trax have seen a surge in market adoption for the new service, clearly indicating that the Repo community is recognising the advantages of trade date post-trade automation.