Into the uncharted electronification of credit and EM financing markets

Into the uncharted electronification of credit and EM financing markets

By Andy Wiblin, Chief Product Officer at GLMX

The pace of electronification of the securities financing market has accelerated in recent years, driven in part by regulations such as MIFID II and SFTR, but also by cost pressure to do more with fewer resources. This has undoubtedly delivered benefits to the market, but in terms of true value of automation and efficiency, is this just the beginning? There is real potential to add immediate and significant value to the credit and emerging markets segments in terms of operational efficiency.

To date, streamlining the daily securities financing workflow in government bond repo has been the primary focus. However, the credit and emerging markets segments have been somewhat neglected, with limited access to technology solutions that cater to their specific needs. The industry has been reluctant to change behavior and resistant to discover the efficiencies that electronification will provide. The market for cash bond trading has seen a proliferation of platforms catering to electronic execution. Dealers have looked to increase automation and reduce operational friction to boost returns, but without considering the credit repo markets, which grease the wheels of the corresponding cash trading, there is still a weak link in the chain. Arguably, this weakness is even more important to address given the specific complexities of this segment of the market including the multi-step and multi-variable nature of initial trade negotiation and the administrative drag of ongoing trade maintenance.

The challenge lies in transforming the complex liquidity ecosystem that exists between clients, their dealers, and their own counterparts, and streamlining communications to eliminate friction and operational risk wherever possible. This will then allow the key parts of the ecosystem – sales and trading – to focus on where they add most value: ensuring best execution and management of relationships, risk and scarce resources.

Buy-side participants in securities financing span a wide variety of organizations. Each one, though, requires a consistent, easy-to-use interface for their liquidity pool that accurately reflects the different stages of negotiation, from pre-trade locates, price discovery and comparison, through to execution. For credit and emerging markets in particular, once the trade is on, managing the day to day maintenance is complex, labour intensive and fraught with operational risk. This maintenance ranges from handling re-rate requests from dealers to managing changes in the underlying position through resizes to substitutions and close-outs. The ability to manage both the initial trade negotiation and subsequent lifecycle management within a single platform, such as GLMX, is a key enabler for complexity, cost and operational risk reduction.

Moving from a world which is highly manual in terms of its communication flow (as email and instant message exchange still reign as the dominant channels) to a platform presents the additional benefit of providing better analytics. Firms can gain a deeper understanding of their access to liquidity and how that evolves over time by tracking clean and consistent data covering pre-trade, negotiation and post-trade. These concrete metrics can allow players to have meaningful, data-driven discussions with their counterparts to help improve key relationships. Not only are these data necessary to better analyze trade metrics, but they may also be required by future regulations and benchmark rates like the imminent Secured Overnight Financing Rate. As of now, these data are difficult to obtain, especially from less-regulated buy-side institutions; however, to accurately read this mammoth marketplace it will be necessary to track these trades more thoroughly. The data generated, and captured digitally, as part of this can allow broker-dealers to better understand their clients’ current and historical flows and needs, benchmark their own performance against internal targets, and feed directly into their own trading decision support.

In a world of increasing cost pressure, reduction of operational friction is vital. Receiving client flow digitally with contextual decision support (including inventory, pricing and credit) allows negotiation back and forth quickly and easily. Specifically, for credit and emerging markets securities financing flow, having the ability to provide rapid pre-trade locates, initiate flow to source inventory and then manage the open trading book through lifecycle management is critical. Beyond that, full straight-through processing (STP) provides for virtually zero operational risk on the back-end. When talking to current and potential clients, we’ve discovered that some of the biggest pain lies within the credit and emerging market repo segment. That is why we’ve invested in extending an already flexible platform to cater to the nuances and complexity of these flows. We’ve seen tangible excitement from our users as they realize how some of their daily flows are now simplified.

No discussion on securities finance would be complete without reference to SFTR. In our experience the level of preparedness for SFTR is low. The regulation is large and complex, and platforms such as GLMX are a key building block in the compliance journey, both from a matching perspective and in terms of accessing the data required by SFTR. Negotiating trades and managing their subsequent lifecycle on a platform means they are matched at the source and thus, ahead of actual reporting. This offers the benefit of reducing the operational friction caused by breaks and subsequent curing within the mandated timescales.

Perhaps most importantly, utilising a platform allows maximum time for the human capital intensive activity of managing relationships with clients. The business will still be driven by relationships, only now, technology allows people to focus on the relationship rather than the related administration. Looking forward, automation across all sectors of the securities financing markets allows for deeper relationships, richer conversations, and overall more efficient markets.