What’s Next for Repo Post-Trade Workflows?

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.

Could Repo Compression Work for the Industry?

Derivatives compression at OSTTRA is a global success story but can it be applied successfully to repo? Over the last 25 years, we have reduced the derivatives notional exposure of dealers by trillions of dollars, reducing systemic risk and creating balance sheet savings for participants. New incentives for bank risk reduction now are on the horizon: the Basel III Endgame, Basel Committee proposals on calculating G-SIB scores daily instead of annually, T+1 settlement and even climate change require that banks evaluate their options for further balance sheet savings. A fair question being asked is, could compression apply to repo markets, how would it work and what could it save?

Conceptually, repo compression is an attractive idea. By reducing the notional exposure of positions on banks’ balance sheets, banks will naturally save on RWA, G-SIB and Leverage Ratio costs tied to credit exposure and gross assets and liabilities. A lower requirement for balance sheet on the repo desk could make banks more competitive or give them a stronger internal argument when they need an allocation. In technology and risk, fewer positions mean less calculations, which means fewer opportunities for error and lower cloud computing costs. Regulators may also find compression attractive, since lower notionals mean less systemic risk from less interconnectivity between leveraged institutions.

OSTTRA conducts portfolio compression runs for cleared and uncleared interest rate swaps, cross-currency swaps, credit default swaps, FX forwards and commodity swaps. Given the economic similarities of these products to secured financing, it could make sense that compression could apply to repo also. But before jumping in, there are some facts to consider.


What would repo compression require?

The derivatives market supports multiple conditions that must also be met for the repo market to benefit from a compression service. These include:


How much could be compressed in repo?

Since repo compression relies on transactions that are outstanding for a period of time, the portion of repo that would most likely benefit are term trades over 30 days. In the US, the percent of US Treasury (UST) term transactions outstanding on the books of primary dealers in March 2024 was $861 billion, $592 billion of which was in reverse repo and $270 billion was in repo, according to Federal Reserve Primary Dealer data.¹ This was 26% of the reverse repo total and 12% of the repo total. There is also an unknown portion of the $1.7 trillion in UST reverse repo and $2 trillion in repo that is booked overnight or under 30-day term but is held for a long duration; this could be considered term if both counterparties agreed to change the formal contractual obligation. Primary dealers form the type of concentrated market that benefits from compression.

In Europe, EUR 2.1 trillion of the EUR 10.8 trillion in both reverse repo and repo volumes were term over 30 days, according to ICMA’s repo survey conducted in June 2023.² There was another EUR 6.7 trillion in under 30-day volume that could potentially be recategorised as term if compression were a service. On the downside, the ICMA survey captured 62 entities. Depending on the distribution of the volumes, this may be too large a number for viable compression and may reduce the amount of available assets.

In derivatives markets, initial compression exercises have reduced notional values by 50%-80%, depending on trades and currencies. If even 50% of UST repo trades with over 30 days of term at primary dealers in the US and 50% of European term volume over 30 days were reduced, that would take away 9.5% of total UST notional volume and 9.7% of total European notional. Removing $431 billion and EU 1.05 trillion of balance sheet heavy, low margin transactions could be meaningful when looked at through the lens of balance sheet capacity (see Exhibit 1).

Exhibit 1: Reduction of notional value from potential repo compression (Term trades > 30 days)

Source: Finadium

Avoiding physical settlement: an opportunity for DLT?

The market would also need to solve the question of how collateral and cash would move to settle the results of a compression exercise. Derivatives are easy in this respect: they are paper agreements that can be torn up and replaced with a smaller set of contracts by counterparty. Repo on the other hand requires that custodians and triparty agents engage to effectuate the movement of cash and collateral for both practical and contractual reasons. Any compression effort that ignores physical settlement will not get far.

OSTTRA has seen this challenge before in other markets with physical settlement. Compressing a portfolio of short dated oil contracts seems like a good idea until there is an oil tanker in the ocean on its way to a port. Likewise, metal or commodity futures with physical delivery elements present challenges for compression.

In repo and collateral, this condition gives rise to the idea that incorporating Distributed Ledger Technology (DLT) could make repo compression viable on a broad scale by removing settlement friction. A digitised ISIN could be used as the representation of the asset or cash while keeping the actual securities or cash immobilised at a custodian. A compression service could then direct the registry of the ISIN to make changes to the digital ledger; a trade registry or database that needs to be updated is much easier for compression to direct than asset transfers.

A similar model could be applied to triparty although given the number of triparty agents in the market, compression could turn into a series of smaller exercises that miss liquidity pools. It could be that attempting compression by triparty agent would lose the concentration of market participants or assets that is a prerequisite for a successful service.


OSTTRA is in the repo market already – should compression be next?

OSTTRA already has services that support post-trade repo processing, including the automation of affirmation and confirmation, lifecycle event management and allocation processing via OSTTRA MarkitWire. By creating a legally confirmed record, OSTTRA helps meet growing regulatory demands to increase settlement efficiency, minimising trade breaks due to a consistent data model and reducing trade confirmation processing times from days to minutes. In addition, the OSTTRA reconciliation service triResolve ensures the accuracy of repo portfolios on a multilateral basis, with streamlined exception management processes.

The next step for analysis will be the involvement of large dealers. While an initial review of data suggests that term repo trades reported over 30-days are a large enough market to make an impact, only dealers have the information on their books to confirm the hypothesis. Further, dealers can identify what percent of their overnight of under 30-day repo transactions are term in disguise by virtue of informal agreements or evergreen contracts.

If enough dealers are interested and there is a concentrated, two-sided market of size with adequate term, OSTTRA would continue the conversation. Repo could be the next opportunity in portfolio compression. We invite the market to come talk with us about the possibilities.

This article was originally published by Finadium


¹ Primary Dealer Statistics, Federal Reserve Bank of New York, available at https://www.newyorkfed.org/markets/counterparties/primary-dealers-statistics
² “European Repo Market Survey No. 45,” ICMA, December 2023, available at https://issuu.com/icma/docs/icma-repo-survey-december-2023/4?ff&experiment=new-bff-dynamic

OSTTRA to Launch Ground Breaking Repo Confirmations Service, Powered by MarkitWire

NEW YORK, LONDON, 17 May 2022 – OSTTRA, the global post-trade solutions company, today announced the launch of OSTTRA Trade Processing for Repos powered by MarkitWire, the leading electronic trade confirmation and processing platform. The service is expected to be live in Q3 2022 and testing is underway with more than 10 firms, including global banks, brokers and investment managers.

OSTTRA Trade Processing for Repos will bring new efficiencies to the Repo market, which has lagged behind the post-trade automation achieved in other asset classes. The new service will establish a set of industry standard electronic workflows for Repo trade confirmation and life-cycle event management, built on MarkitWire’s extensive global network. By creating a legally confirmed record, updated through the trade lifecycle, the service will help meet growing regulatory demands to increase settlement efficiency, minimising the need for reconciliation, and reducing trade confirmation processing times from days to minutes.

With the Interest Rate and Repo markets coming closer together as a result of the transition to risk free rates, OSTTRA is harmonising the post-trade processing of both asset classes by bringing them together on MarkitWire, the global platform for confirmation and processing of Interest Rate Derivatives.

OSTTRA was formed in 2021 through the combination of MarkitServ, Traiana, TriOptima and Reset, four businesses that have been at the heart of post-trade evolution and innovation for more than 20 years.  The launch of the new Repo service reflects OSTTRA’s ongoing commitment to build upon its global network and expertise to streamline post-trade workflows across a broader range of asset classes.

Peter Altero Jr, Head of Rates Business Development at OSTTRA said: “The introduction of new regulatory mandates has focussed our customers’ attention on Repo post-trade workflows, which have been slow to evolve. Following broad engagement via our industry working groups, we’re leveraging our established MarkitWire platform and global community of 2,000+ firms to transform the Repo post-trade lifecycle, delivering a real reduction in cost and risk.”

Matthew Woodhams, Head of eCommerce at Tradition, added: “Given the trajectory towards post-trade electronification and automation, coupled with the volatility present in securities lending markets, we expect OSTTRA Trade Processing for Repos to bring significant efficiencies to our Repo operations, creating a strong business case for greater involvement in these markets.”

To find out more about our Repo Confirmation service, click here.