European Credit Repo Market Ripe for D2C Automation

The European credit repo market is a relative minnow at around $736 billion in size, making up roughly 13 percent of the overall repo market in Europe, the remainder being attributable to sovereign bond repo. But it fulfills a vital function, ensuring that banks and other participants are able to meet their liquidity requirements on a daily basis.

But in contrast to other markets, practices in credit repo are still highly manual, according to a study by the International Capital Market Association (Icma). Interest and axe lists are routinely cut and pasted into Bloomberg messages and shared among trading desks, while hard-to-work orders are still largely conducted by telephone, relying on interpersonal relationships to execute. Microsoft Excel spreadsheets, shared between brokers, dealers and clients, are a primary source of information.

“On the face of it, this is a market screaming out for automation,” says Andy Hill, senior director, market practice and regulatory policy at Icma, and the author of the study. However, whereas foreign exchange (FX), equities and even bond markets to an extent have all undergone transformations to electronic processes, credit repo remains a difficult nut to crack from a technology perspective.

“I think it’s a bit of a chicken-and-egg scenario,” Hill tells WatersTechnology. “It is clear to see that automation could bring efficiencies, but this costs—both for the providers to develop the solutions, and for the users to plug into it. The dealers have managed for years without any degree of meaningful automation or technology, but this could be changing, particularly as reporting and data capture become more important. So it may be a case of first-mover advantage for the solution providers. But it still needs somebody to invest some money.”

That investment could be expensive, as the nature of the credit repo market—highly individualized trades, complex negotiations and the lack of a standardized data hub such as an exchange—makes any technology platform difficult to develop. That’s not to say that others haven’t tried. BondLend is currently the most popular platform of its kind in the market and is upgrading to a new technology platform, for instance, with ambitions to offer dealer inventories, special pricing and other such information in the inter-dealer space. But a central-limit order book (CLOB)-style model, given the bespoke nature of the market, looks impossible to accomplish.

Instead, Icma suggests, the dealer-to-client space could be the main beneficiary of any automation push within credit repo.

“BondLend is filling the gap in the lender-to-dealer part of the equation. There is nothing quite there yet filling the dealer-to-client space, at least with respect to credit repo,” says Hill. As with other markets, he suggests, new rules such as the Securities Financing Transaction Regulation (SFTR) and Markets in Financial Instruments Regulation (Mifir), which contain increased requirements for reporting and data management, could prove to be a driver in this regard.

“I think the whole repo market will move onto some form of automated platform solution for dealer-to-client, whether these are firms’ proprietary systems, or third-party multilateral trading facilities. I don’t see how it can carry on post-SFTR and Mifir the way it does now,” Hill says.