Dealers and clients will need to work at pace to streamline their operations as the market experiences complex operational challenges, says Neil Taylor, Head of Repo Business Development, OSTTRA, who explores the importance of investing in repo post-trade workflows.
The repo market is facing its next series of complex operational challenges, driven by a mix of regulations and market practice changes. This phase of market evolution will require sharp thinking by dealers and clients on what automation and post-trade processing should look like, and how counterparties can work together to maximise improvements in existing workflows and processes.
Current discussion surrounding post-trade workflows, is beginning to move repo outside of a silo and into a broader framework of collateralised products. This is evident in the growth of sell side collateral optimisation and buy side portfolio finance desks. These units can come under multiple names, such as financial resource optimisation, treasury, or collateral trading. Regardless of what they are called, repo can now be considered one of several products that should be looked at together to capture processing efficiencies, reduced costs and additional revenue.
Investing in improving repo post-trade workflow helps to capture the use of a firm’s assets beyond just repo settlement. Adding repo post-trade efficiency to initial margin and variation margin postings for OTC derivatives, for example, means having a clearer and faster view of available cash and securities, thereby reducing risk-weighted assets (RWA) for regulated institutions. As we enter a Basel III Endgame environment, even small improvements in processing speed and accuracy can deliver outsized benefits.
Repo will be impacted downstream by T+1 in North America. Any financed trade will need to be entered into and unwound with the same accuracy as the underlying asset’s settlement cycle. US Treasuries are already settled on T+1, but the flexibility that a dealer may have had with a repo financing trade on an equity, settling at T+2, will soon be curtailed. Improved post-trade workflows will result in greater income, with the ability to more closely tie settlement cycles together for financing and asset settlement in one activity. Conversely, chasing exceptions or poorly tying funding streams to asset purchases and sales, will result in lost opportunities and revenues.
The potential introduction of T+1 in Europe would bring similar requirements with a regional twist, due to the current levels of infrastructure fragmentation compared to the US. This leads industry associations to recommend strategies that benefit a wide range of products. Among these are a need to streamline exceptions processing, speed up exception resolution, and optimise the settlement of available inventory.
T+1 is not expected to be easy in Europe without robust post-trade automation, especially in securities finance and repo. In a 2024 call for evidence, the European Securities and Markets Authority (ESMA) noted a long list of complications from a European move to T+1 including “The reduction of 80 to 90 per cent of the available time for post-trading processes, the lack of automation, and inventory management”, also noting: “Securities borrowing and lending, repo, FX trading and cross-border activities seem to be some of the most challenging aspects of a transition to T+1.”
Post-trade processing in repo will be central to this conversation, once regulators propose their rules.
The expected introduction of mandatory clearing for US Treasuries and US Treasury repo over the next two years, and the beginning of discussions in Europe about similar regulation, also point to a need for more efficient repo post-trade workflows.
Market participants expect that the mandatory clearing rules will require a large number of new clients to sign up for a CCP — this could impact the firms that were captured by Uncleared Margin Rules (UMR) over the last few years. New clients, new rules and new workflows, will all combine to create the potential for confusion in the early days. And while most US Treasury repo transactions will be cleared, there will remain a large segment of the market, including the official sector, that will require counterparties to maintain processing for both CCP and bilateral transactions.
It is no surprise that improved post-trade technology will be the only viable solution for extending repo settlement benefits to margin across other products. T+1 in North America, and later in Europe, as well as mandatory clearing (which will begin in the US), will mean that not only will manual processes not be acceptable, but they will not succeed at all in this environment.
These are complex times. Dealers and clients will need to work at pace to streamline their operations, and ensure that reliable, scalable and efficient post-trade workflow solutions are delivered across cleared, bilateral, repo, and other collateralised trading products.
OSTTRA provides services that support post-trade repo processing, including the automation of affirmation and confirmation, lifecycle event management, and allocation processing via OSTTRA MarkitWire. Transactions previously captured on OSTTRA MarkitWire can soon be leveraged to achieve settlement via straight-through processing (STP), through SWIFT connectivity to custodians and depositories.
In addition, the OSTTRA reconciliation service, OSTTRA triResolve, ensures the accuracy of repo portfolios on a multilateral basis, with streamlined exception management processes.
The home of MarkitServ, Traiana, TriOptima and Reset, OSTTRA brings the expertise, processes and networks together to solve the post-trade challenges of the global financial markets. OSTTRA aims to strengthen the post-trade infrastructure and ecosystem, with robust and progressive end-to-end post-trade solutions and unrivalled connectivity.