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40. Mapping the interdealer European repo market (January 2019)
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The European interdealer repo market can be usefully structurally differentiated at three stages of a transaction’s life:
  • trading --- the negotiation and execution of transactions (the formation of contracts);
  • clearing --- the netting by counterparties of (1) in the normal course of business, opposite obligations to deliver the same collateral security (same ISIN) to each other on the same day and opposite obligations to pay cash in the same currency to each other on the same day to produce a smaller residual delivery and payment obligation; and (2) after a default, all mutual obligations to produce a single exposure for immediate settlement --- which can be bilaterally or across a central counterparty (CCP);
  • collateral management --- the selection of specific security issues to deliver as collateral and the maintenance of the value of that collateral and the processing of other events such as income payments on the collateral.*i
There is a fourth stage in the life-cycle of a transaction --- the settlement of collateral securities transfers and sometimes related cash payments --- but, as there is a considerable and increasing choice available to trading venues, clearing systems and collateral management agents about which settlement and payment systems they can use, differences between the settlement and payment systems used by dealers are not a particularly useful way of analysing the European repo market.*ii, *iii  

There is also a fifth stage, although this actually occurs between trading and clearing --- the post-trade, pre-settlement verification of transaction details and settlement/payment accounts --- but this also is not a useful way of structurally differentiating repo activity. Verification of repos can take the form of ‘confirmation’ and also ‘affirmation’.*iv The process of confirmation and affirmation is one of ‘matching’ the records of the counterparties as soon as possible after execution in order to identify mistakes or misunderstandings. Confirmation and affirmation are important for risk management. Matching also takes place at CSDs, ICSDs and custodians but only of settlement details and only near the end of the post-trade process (too late for risk management purposes).

Finally, there is an important sixth stage in the life-cycle of a transaction --- the regulatory reporting of transactions, increasingly via a trade repository --- but this also is not a useful way of structurally differentiating repo activity.

The trading map

Repo can be traded through a variety of old and new technologies:
  • Telephone or electronic messaging systems.
    • The use of telephones or electronic messaging systems is called direct trading, in that the technologies do little more than allow parties to communicate directly, by voice or in free-form text.
    • Telephones and electronic messaging systems are also used by voice-brokers. These are arrangers who collect prices from dealers by phone or online, then select and broadcast back the best bids and offers. Voice-brokers can display prices (and other information) to dealers on the screens of the commercial networks operated by information vendors such as Bloomberg and Thomson Reuters but restricted to the voice-brokers’ customers. Some voice-brokers also operate their own networks to collect and display prices. If one of the connected dealers wishes to accept a price displayed by a voice-broker, he contacts the voice-broker by telephone or online. The voice-broker reveals the identity of the quoting party and, if the names are acceptable to each other, puts the two parties in touch. This allows the parties to negotiate further and to organise settlement between themselves. A voice-broker charges a pre-agreed commission to both counterparties on completed transactions. The major repo voice-brokers in Europe are BGC (Partners), GFI (Group), Tradition and Tullett Prebon ICAP.*v
  • Automated trading systems. Some voice-brokers operate networks of interactive screens. Dealers can enter prices directly and the voice-brokers can enter transactions that have been negotiated by telephone into the systems. These systems are automated but not automatic, in that transactions cannot be executed and settlement cannot be initiated and completed automatically simply by clicking on a screen. Additional action is required from the counterparties before transactions can be consummated, eg credit approval, further negotiation on terms such as collateral haircuts and the despatch of settlement and payment instructions. Automated trading systems run by firms who are not voice-brokers (eg Tradeweb Markets and GMLX) are also available in repo and increasingly used by dealers to connect to non-dealer customers. Such systems usually employ a trading technique called request-for-quote (RFQ), in which, a customer typically advertises an order to several dealers, who can respond with prices from which the customer can select a quote and either execute a transaction or engage directly in further negotiation.
  • Automatic trading systems (ATS). These are dedicated networks of interactive screens on which prices are displayed for orders in repo of various tenors, amounts and types of collateral (individual issues or classes or special baskets of securities). ATS are automatic in that transactions can be executed and settlement can be initiated and completed automatically simply by clicking on an interactive screen (this straight-through processing is possible because of operational and legal links between the ATS and the entities in the next stages of the clearing and settlement process, ie CCPs, collateral management agents, and CSDs or ICSDs).*vi  The ATS operating in Europe are:
    • BrokerTec, which is based in the UK and owned by NEX Markets; it is the leading ATS in Europe for repo other than of Italian securities;*vii
    • Eurex Repo, which is based in Germany and part of Eurex Exchanges, owned by Deutsche Borse AG; Eurex Repo operates three repo market segments:
      • the Euro Repo Market
      • the Swiss Franc Repo Market, formerly a joint venture with the Swiss exchange SIX
      • the Euro GC Pooling Market.
    • MTS Repo (sometimes known as the Telematico), part of MTS Group, which is based in Italy but majority owned by the London Stock Exchange Group; claiming a 90% share of the Italian repo market, with small volumes in other markets;*viii 
    • SENAF, which is based in Spain and owned by the BME Group, with a largely domestic membership; since 2011, it has seen no volume in repos.*ix
    • SIX Repo, which was carved out of the joint venture Eurex Repo Swiss Franc Repo Market in May 2014 as an independent platform.
The clearing map

Repos can be:
  • Uncleared --- this would now be unusual for dealers, given that netting is a standard feature of bilateral repo master agreements.
  • Bilaterally-cleared --- in the normal course of business, a party nets opposite mutual delivery and payments obligations separately with each of its counterparties under a master agreement, to produce a set of smaller residual single daily delivery and payment obligations with each counterparty (one in each security and one in each currency) and, in the event of a default by a counterparty, results in a single exposure in the same currency for immediate settlement.
  • Multilaterally-cleared*x --- at the inception of a transaction between member firms or shortly after execution, a central clearing counterparty (CCP) is inserted into the middle of each transaction to (1) become the high-quality buyer to the seller and the high-quality seller to the buyer and (2) net opposite delivery and payments obligations between itself and each member firm, resulting in a set of smaller residual single delivery and payment obligations between the CCP and each member firm (rather than a separate set between each pair of counterparties).
The CCPs which are currently clearing repos in Europe are:
  • CC&G, which is based in Italy but owned by the London Stock Exchange; its repo clearing business is drawn entirely from MTS and is limited to Italian government bond collateral.*xi  
  • Eurex Clearing, which is based in Germany and owned by Deutsche Börse AG; it only clears repos transacted across Eurex Repo (which in turn only uses Eurex Clearing).
  • LCH Ltd, which is based in the UK and part of LCHGroup, which is majority owned by the London Stock Exchange; its repo clearing business covers a wide range of European government securities.
  • LCH SA, formerly called Clearnet, which is based in France and part of LCH Group; its repo clearing business has traditionally been in French government bond repo and, to a lesser extent, Italian and Spanish government bond repo but, with the creation of T2S and the possibility of netting between connected CSDs, as well as uncertainties over access to LCH Ltd after Brexit, is expanding into other Eurozone government bonds; it operates a link to CC&G.
  • BME Clearing Repo (formerly MEFFClear and MEFFRepo), which is based in Spain, is the business name for the fixed-income clearing segment of BME Clearing, which is the CCP owned by the BME Group; its repo business is limited to Spanish bond repo transacted across SENAF or arranged through voice-brokers and registered with the CCP post trade.*xii, *xiii  
There has been talk of repo CCPs being established in the Nordic region (by Nasdaq OMX) and Poland (by KDPW_CCP), but there is little evidence so far of substantive progress.

The collateral management map

Collateral management is a choice between:
  • Bilateral collateral management, in which the counterparties themselves select the securities in their accounts which are to be delivered as collateral in settlement or maintenance of a repo, and perform all the other functions of collateral management.
  • Tri-party collateral management, under which the function is outsourced to an agent (see question 24). Once correctly and consistently notified of a transaction between two users, the tri-party agent selects securities from the account of the seller that fall within eligibility criteria pre-agreed between the parties (the set of eligible securities is usually known as a ‘collateral basket’) and delivers the selected securities to the buyer against simultaneous payment. The tri-party agent then maintains the value, quality and performance of the collateral.*xiv The tri-party repo agents currently operating in Europe are:
    • Bank of New York Mellon (whose system is called RepoEdge); which is also the sole tri-party agent in the US; and has a sizeable global tri-party equity repo business;
    • BP2S based in Lisbon --- owned by BNP Paribas;
    • Citibank;
    • Clearstream Banking Frankfurt, the German CSD --- owned by Deutsche Börse AG;
    • Clearstream Banking Luxembourg, one of the ICSDs --- owned by Deutsche Börse AG;
    • Euroclear Bank, the other ICSD;
    • Euroclear UK and & Ireland, often called CREST, the UK and Ireland CSD, operates a special tri-party collateral management functionality called Delivery By Value (DBV) --- a subsidiary of Euroclear;
    • JP Morgan;
    • Monte Titoli, the Italian CSD (whose tri-party system is called X-COM) --- this service was launched in 2012, and is currently limited to collateral management with the Bank of Italy in support of ECB operations;
    • SIX SIS, which is based in Switzerland and owned by the SIX Group; it is operationally integrated with SIX Repo.*xv
Clearstream and Euroclear integrate their tri-party agencies with their securities settlement and payment services. Indeed, tri-party collateral management services are currently only available to the custody clients of the tri-party agents, because of the close operational linkages needed between custody and collateral management services in order to operate a tri-party service.

Where a tri-party collateral management agent is involved in the post-trade processing of repos, the business being supported is often described as ‘basket trading’. This is because the parties negotiate only the amount, tenor and rate of the repo, and delegate the selection of collateral to the tri-party agent, who will automatically pick, from the account of the seller, one or more of the securities that are listed in a pre-agreed basket of eligible securities. The contents of baskets will have been agreed by the parties or, if the trading is electronic, prescribed by the ATS or, if transactions are being cleared, prescribed by the CCP.*xvi  Given that collateral selection is delegated to the tri-party agent, tri-party repo is a type of GC repo or ‘cash-driven’ repo (see question 8). Basket trading, when execution is electronic and there is clearing by a CCP, is known as GC financing.
Three-dimensional mapping

The three key mapping stages above can be linked ‘vertically’ in a variety of configurations, which are summarised in the table below. The key vertical interdealer linkages in the European repo market are:
  • ATS + CCP + bilateral collateral management --- this is the principal business model in Europe. BrokerTec and MTS link to several CCPs and allow the use of either ICSD or several CSDs, whereas Eurex Repo is exclusively linked to Eurex Clearing for clearing.  
  • Direct trading + bilaterally clearing + bilateral collateral management --- this is the traditional pre-electronic market.
  • ATS + CCP + tri-party collateral management --- this is the GC financing model of Eurex Repo’s Euro GC Pooling Market and the market in the LCH’s £GC and EuroGC+ baskets offered for trading on BrokerTec and managed by tri-party agents Euroclear Bank and Clearstream Banking Luxembourg.
Note that it is not (currently) possible to trade directly with a party, then register transactions post trade with a CCP and outsource collateral management to a tri-party agent.

Table: links between repo trading, clearing and collateral management

Source: R Comotto (2018)

Market shares

In the ICMA’s semi-annual European repo market survey and the now-discontinued ECB Money Market Survey, the various alternative combinations of trading, clearing and collateral management are grouped into:*xvii, *xiii   
  • Direct, which is connected to either bilateral or tri-party collateral management. Direct trading accounted for about 61% of outstanding repo business measured by the ICMA survey in June 2018 (the total for which was EUR 7,351 billion). About 6% of direct business was tri-party and another 6% was registered post-trade with CCPs. The final ECB Money Market Survey suggested that about 20% of turnover in 2014 was traded directly and some 10% was tri-party.
  • Voice-brokered accounted for about 10% of outstanding repo business measured by the ICMA survey in June 2018, and over 15% of turnover in 2014 in the ECB Money Market Survey.
  • Electronic (ATS only). Electronic trading accounted for some 29% of outstanding repo business measured by the ICMA survey in June 2018. Some 28% of the total outstanding business was cleared across CCPs (most of it electronic). The ECB Money Market Survey suggested that two-thirds of turnover in 2014 was traded on ATSs and a similar proportion was cleared across CCPs. GC financing, in the form of Eurex GC Pooling, had outstanding business of about EUR 67 billion in June 2018 (there was little or no trading in other CCP-defined GC baskets), compared with a total of some EUR 1,220 billion for all ATSs.*xix
Chart: ICMA survey analysis of the European repo market

Source: R Comotto (2014)

The market interfaces between dealers and between dealers and customers

In terms of the value of outstanding contracts, it is generally thought that interdealer business accounts for about one-half of the European repo market, although the share of customer business varies widely between market segments and dealers. ‘Customers’ include:
  • smaller commercial banks (with insufficient repo business to justify the expense of joining an ATS and/or linking to a CCP)
  • central banks conducting investment operations (ie repos not driven by monetary policy)
  • international financial institutions (eg multilateral development banks) investing cash balances or lending securities from their investment portfolios
  • other official investment institutions, such as sovereign wealth funds and debt management offices (DMOs)
  • non-bank financial institutions (eg pension funds, insurance companies, money market and other mutual funds, securities lending cash collateral reinvestment agents, hedge funds, other alternative investment funds and other asset managers) investing cash balances, covering short-term liquidity needs (including cash for variation margin for their derivative hedges) and leveraging their portfolios (often as part of the hedging of long-term liabilities)
  • a few non-financial institutions (eg large corporate treasuries) investing cash balances
  • retail investors in countries such as Italy, Scandinavia and Spain investing savings.
Hedge funds access the repo market through prime brokers (principally for fixed-income financing or borrowing). These are specialized divisions of large investment banks which offer funding, securities lending and other services such as execution, risk management, custody, reporting, clearing and settlement to hedge funds.

Virtually all parties transacting on ATSs and/or clearing across CCPs are currently dealers (with the exception of Eurex’s ISA Direct facilities). This reflects past membership rules and the scale and type of business needed to justify membership of these financial market infrastructures (two-way business in the case of CCPs). However, CCPs have been launching ‘client-clearing’ schemes, which offer non-dealers ‘sponsored’ access to clearing under the aegis of an existing dealer member or limited membership. Client access does not require the client to underwrite the dealer members of the CCP (the so-called ‘mutualization’ of risk) and allows them to delegate many operational functions. The traditional dealer members of CCPs hope client-clearing will allow them to enhance the efficiency of their netting by including client positions in order to reduce their exposure to regulatory costs.

The voice-brokered repo business is entirely interdealer.

Tri-party repo in Europe is largely between, on the one hand, investment banks (as sellers) and, on the other hand, commercial banks, central banks conducting investment operations, multilateral development banks and money market mutual funds (as buyers or cash investors). Some central banks allow commercial banks to use tri-party systems to manage the selection, delivery and maintenance of collateral for monetary policy transactions (eg Germany, France and Italy) and a system is being developed by the ECB for the eurozone.  

There are electronic trading systems which connect dealers to customers but these customer-to-dealer systems are automated and not automatic. Some dealers offer proprietary bilateral automated trading systems to their customers (eg Deutsche Bank’s Autobahn or Barclay’s STRAX) on which customers can see or request price quotes only from the dealer operating the system.

There are also commercial multilateral automated trading systems, connecting individual customers to panels of competing dealers who are signed up to support the system by providing competing price quotes. Typically, a customer makes a request for quotes (RFQ) and dealers on the panel respond without seeing competing quotes. The customer accepts the best quote or can negotiate. Examples of such multilateral systems are:
  • Bloomberg Repo Electronic Trading system, launched in 2005, is part of the Bloomberg Professional service, operated by Bloomberg LP. It is described as a customer-to-dealer multi-bank RFQ electronic trading system for repos.
  • GC Pooling Select, launched in 2012, ISA Direct Select Invest, launched in 2013 and ISA Direct Select Finance, launched in 2016, by Eurex Repo. Select and Select Invest allow investors to negotiate reverse repos with dealers (lending only) on the telephone or to enter an RFQ to one or several banks directly into the GC Pooling system. Select Finance allows repo or reverse repo to be transacted (borrowing and lending) with dealers on either the GC Pooling or main Eurex Repo systems. Once an offer from the bank has been agreed by the customer, the transaction is entered into the system by the bank. The cash payments to and from the customer are via Deutsche Börse Group, which acts as principal intermediary between the customer and the bank. The matching transactions between Deutsche Börse Group and the bank are cleared by Eurex Clearing and collateral management is delegated to Clearstream.
  • Tradeweb is part of Tradeweb Markets LLC, which is majority-owned by Thomson Reuters, with shares also held by Goldman Sachs, JPMorgan, Morgan Stanley, Citigroup, Bank of America, Credit Suisse Group, Deutsche Bank, UBS, Royal Bank of Scotland Group and Barclays. Tradeweb was launched in 1998 but has offered a customer-to-dealer RFQ trading system in repo in Europe since 2011. Customers can request up to five quotes at one time.
As new regulation has weighed on the balance sheets of repo dealers, wholesale customers such as pension funds, insurance companies and mutual funds have experienced occasional difficulty in transacting repo, often at end-year. The balance sheet constraints on dealers have led to a new wave of innovation seeking to connect such customers directly with each other across specialised electronic trading platforms. These so-called ‘all-to-all’ or ‘peer-to-peer’ systems offer GC financing, usually with collateral management delegated to tri-party collateral management systems. The most prominent examples are currently Elixium and GMLX.

i. Collateral maintenance involves: regularly revaluing the collateral; calling agreed variation margin from or delivering to the other party, or performing agreed repricing/adjustments, whenever a material uncollateralised exposure arises or in order to preserve haircuts/initial margins; responding to the occurrence of income payments, corporate actions and other events on the collateral; and responding to valid requests for the substitution of collateral.

ii. This will certainly be the case in the EU once MiFID II/MiFIR and the CSD Regulation (CSDR) have been fully implemented. At the moment, there are exclusive links between some trading venues, clearing systems, collateral management agents and settlement/payment systems. For example, Eurex Repo’s Euro GC Pooling Market only connects to Eurex Clearing for clearing and Clearstream for collateral management and settlement/payment (although discussions being mediated by the ECB and ICMA’s European Repo and Collateral Council (ERCC) have been taking place to allow tri-party ‘interoperability’, which means users of Euro GC Pooling would be able choose Euroclear Bank or another collateral management agent). Access to some settlement systems is also difficult for foreign clearing systems.

iii. Settlements of securities transfers take place across the securities settlement systems (SSSs) operated by (1) domestic central securities depositories (CSDs) or (2) international CSDs (ICSDs), between accounts in the name of and managed directly by dealers or, on their behalf, by settlement agents called custodian banks. ICSDs are true CSDs for eurobonds but are really cross-border custodian banks for other securities. The method of payment for securities depends on whether settlement is across a CSD or an ICSD. In the case of CSDs, the SSS is connected or integrated with the domestic large-value payment system operated by the central bank (typically operating on the basis of real-time gross settlement (RTGS) and often referred to as RTGS systems). In the eurozone, the separate national central bank-operated payment systems have been connected by the ECB-operated TARGET 2 payment system. In the case of ICSDs, the SSSs are connected to several domestic payment systems, directly or through agent correspondent banks, but the bulk of the transactions settled by each ICSD are between its own customers, which allows transfers of securities and related payments to be made internally, ie between accounts on the books of the ICSD in commercial bank money. Many domestic investors prefer to hold accounts and settle at the national CSD, either directly or through agent custodian banks, whereas many dealers prefer to use an ICSD, as it allows them to concentrate the settlement of their cross-border and multi-currency business. The use of national CSDs means payments are in risk-free central bank money, as opposed to commercial bank money.

iv. Affirmation is performed by counterparties either (1) directly between each other by telephone or e-mail or (2) online across a third-party agent. Third-party affirmation systems with some repo functionality currently include the TRAX II service of Xtrakter Ltd, which is owned by MarketAxess Holdings Inc. The Euroclear Trade Capture and Matching System (ETCMS) performs a similar function for repos, albeit not fully automated that are being submitted to the central clearing counterparty (CCP), LCH. Affirmation is the verification of the key terms and settlement instructions of selected higher-risk transactions that has been developed by the market to mitigate the risk arising from the lack of capacity to confirm all transactions. ’Confirmation’ is the contractual requirement to verify all the economic terms of a transaction as well as settlement instructions. Affirmation is also different from ‘trade-matching’ or ‘settlement matching’, which is the matching by a CSD or ICSD of settlement instructions received from two counterparties on the day before the settlement date. Affirmation compares a wider range of data than trade-matching (some of which is not necessary for settlement) and should take place on the transaction date in order to allow the maximum time for mistakes and misunderstandings to be resolved.
v. Tradition is the interdealer broking arm of the Swiss-based Compagnie Financière Tradition. Tullett Prebon bought ICAP, which was the voice-broking subsidiary of NEX Plc, in 2016 to form Tullett Prebon ICAP

vi. ATS can instruct (if there is no CCP involved) collateral management agents or (if there is no CCP or collateral management agent involved) CSDs/ICSDs, acting on the basis of powers of attorney given to the ATS by the counterparties. If CCPs are involved, they will have power of attorney to instruct collateral management agents or (if no collateral management agent is involved) CSDs/ICSDs on the same basis. If there is no CCP involved, collateral management agents instruct CSDs/ICSDs.

vii. BrokerTec and Eurex Repo are classed as Multilateral Trading Facilities (MTF) under MiFID.
viii. MTS is Mercato Titoli di Stato. MTS Repo is the business name for the repo markets operated by MTS Group. MTS Group is controlled by MTS SpA, which itself is majority owned by the LSE Group. MTS Group operates MTS Italy, whose business includes repos in Italian government securities, and incorporates EuroMTS Ltd, a UK company, whose business includes repos in European government securities other than Italian. MTS Italy is a Regulated Market under MiFID. Euro MTS is classed as a Multilateral Trading Facility (MTF) under MiFID.

ix. SENAF is the Sistema Electronico de Negociacion de Activos Financieros (Electronic Trading System of Financial Assets). It is owned by the BME (Bolsas y Mercados Españoles) Group. SENAF trades Spanish government securities, repos in these securities and certain non-government securities (currently, 14 bank bonds) registered on the BME Group’s AIAF (Associación de Intermediarios de Activos Financeros or Association of Financial Assets Intermediaries), which is the regulated secondary market in Spanish corporate debt. SENAF is classed as a Multilateral Trading Facility (MTF) under MiFID.

x. ‘Multilateral clearing’ is not the correct legal term for clearing across a central counterparty. This should be called centralised bilateral clearing.

xi. CC&G is the Cassa di Compensazione e Garanzia.
xii. MEFF was Mercado Español de Futuros Financieros.

xiii. MEFFClear was formerly a central counterparty, but not a central clearing counterparty, in that it stood between parties as a high-quality buyer to every seller and a high-quality seller to every buyer, but it did not net mutual delivery and payment obligations.
xiv. In addition to collateral maintenance (see footnote i), delegated collateral management requires the agent to manage the substitution of any securities that: drop below the eligibility criteria of the buyer (eg due to a ratings downgrade); are due to make coupon or dividend payments that will be subject to a withholding tax; are required by the seller in order to sell off in the normal course of his business; have failed to be delivered; or can be replaced by newly-received securities that are of lower quality than the current collateral allocation but still meet the eligibility criteria of the buyer (this is called ‘optimisation’). Collateral management agents also manage the life-cycle of the repo, eg refixing the repo rate on open or floating-rate repos.
xv. SIX SIS also classifies itself as an ICSD. Bank of New York Mellon is setting up a new ICSD.
xvi. For example, Eurex Repo’s Euro GC Pooling Market trades two baskets containing about 8,000 and 23,000 ECB-eligible securities from about 20 countries, as well as some international (euro) bonds. About one-third are actively traded.
xvii. See ICMA repo surveys.

xviii. See http://www.ecb.europa.eu/stats/money/mmss/html/index.en.html.

xix. The ICMA analysis is complicated by the fact that Eurex’s Euro GC Pooling and the trading of LCH.Clearnet Ltd’s €GC basket on BrokerTec are simultaneously tri-party and electronic repos.

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