A new Australian venture, Money Market and Debt eXchange (MMADX), is aiming to automate the country’s A$11 trillion money market securities and repo market, with an eye on expanding into other products and territories.
Regulatory reform, changing perceptions of risk and the drive for efficiency by financial institutions are the catalysts to move the trading of these products onto an electronic platform, according to Sean Nunan, chief executive at MMADX.
“The debt markets haven’t advanced in 40 years. They’re still trading over the telephone, whereas equities, foreign exchange, bonds and other securities trading have undergone huge innovations,” said Nunan.
Providing there are no regulatory hiccups, MMADX plans to be operational by July, offering institutions and asset managers a fast and efficient exchange to trade bank bills, treasury bills, certificates of deposit, corporate paper and bond repurchase agreements.
The aim of the new exchange is to have “the vast majority of the wholesale market connected to our system and using it as the primary place to trade money market securities and repurchase agreements,” said Nunan.
The software platform for MMADX is being provided by LIST, the Italian company whose technology underpins e-Mid, the Europe-wide money market securities exchange.
“100% of money market securities and repurchase agreements are traded by phone in Australia – and in the rest of Asia, for that matter – yet these turn over A$11trillion in Australia alone. That’s approximately five times the size of the listed equities and equities options markets,” said Nunan.
MMADX has spent the last 12 months consulting with Australian banks and asset managers to validate the need to go electronic, and the efficiency and risk-management benefits of doing so.
“Banks globally are very much focused on optimising their balance sheets and cost-cutting. Therefore, what MMADX is offering in terms of efficiency of straight-through processing is something they’re very interested in,” said Nunan.
The company is currently 80% owned by its board of directors but as part of efforts to create what Nunan calls “an alignment of interests,” MMADX is in preliminary talks with Australian financial institutions about taking equity stakes in the new venture.
Banks and regulators have changed their view of risk since the global financial crisis and the lack of transparency and other dangers associated with telephone trading are under increasing scrutiny. This is helping provide the impetus to get other forms of derivates trading onto fully automated exchanges.
“Under the Dodd-Frank legislation coming into force in the US, financial institutions will have to trade interest rate derivatives on swap execution facilities (SEFs), meaning anybody wanting to trade with US institutions will effectively have to do so as well,” said Nunan. “That is going to drive the trade in interest rate derivatives around the world onto exchange.”
Once the US Commodity Futures Trading Commission has defined what constitutes a SEF and how they will operate, MMADX will apply to become a SEF and expand its operations into interest rate derivatives – currently a market of over A$18 trillion a year.
With all these products still traded by phone across the Asia-Pacific region, MMADX will be looking at opportunities in other markets once the exchange is established in Australia.