The buy-side are set to become increasingly involved in repo trading as the market moves more towards clearing, according to industry experts at the Euroclear Collateral conference in Brussels.
The central clearing of repo transactions are not yet mandatory, however global minimums for collateral haircuts affecting non-centrally cleared repos could push the market that way.
When prompted, 41% of audience at the event felt that the ratio of cleared GC repos would rise to 50% in five years time.
Gösta Feige, director of product solutions, collateral management at Euroclear, told theTRADEnews.com that the number of cleared trades is more than likely to rise over time.
“It happened with derivatives and everybody survived, so why not in other markets as well,” said Feige.
“If you just look at the structure of CCPs before, they were introduced for the cash derivatives market and they have slowly but surely started for bond trading and there are big volumes in repo trading.
“It is definitely growing, there is demand for it and even the regulators are looking at it and wanting diversification there, so not everything is concentrated on one platform and one clearing house.”
The increasing interest from the buy-side suggests a growing acceptance of outsourcing collateral management.
New rules on capital levels and collateral have placed increased cost pressures on asset managers and pension funds. Regulation has increased their financing needs, and driven them to search for new ways to access higher quality collateral.
One way buy-siders are now meeting this challenge is through the tri-party repo market.
Proving that there is demand there, the DTCC has filed for regulatory approval to provide central clearing for the tri-party repo market.
Feige added that there would still be challenges surrounding cleared repo transactions though.
“On the one hand, it would create a more efficient use of collateral as it would further increase the standardisation of markets and would probably be a safer place,” he added.
“At the same time, you would have yet another infrastructure there with a clearing house, and there would be requirements for becoming a clearing member. Also with the range of acceptable collateral, this is something determined by the clearing house so a certain number of instruments are accepted as collateral but a number will not be, so what do you do with them?
“From the collateral providing side it will still need to be refinanced somewhere and from the other side, you may be willing to accept those but you can’t with the clearing house being in the middle and due to its conservative nature does not accept them.”
