Two integrated repo dealing models due for launch
By Jennifer Hughesin New York
Published: December 13 2005 02:00 | Last updated: December 13 2005 02:00
Trading next year in the US repo market will increasingly involve platforms that combine electronic trading and voice-brokering services with two leading inter-dealer brokers planning to launch integrated dealing models.
BGC, the broker spun off by Cantor Fitzgerald last year, is due to announce today that it will offer one pool of liquidity through running its voice brokering services alongside electronic trading provided by eSpeed, its sister company under the Cantor umbrella.
Rival Icap is expected to make a similar move to combine its repo voice brokering with its BrokerTec electronic trading platform. Both offerings are expected to be available early next year.
Repo agreements consist of linked sale and repurchase deals where participants can, in effect, borrow securities for short periods in return for collateral, usually cash. The repo market is essential to the deep liquidity of the wider US Treasury market and is the means by which investment banks manage much of their overnight financing.
The market has grown rapidly alongside the wider rise in Treasury trading volumes. In 2004, the notional daily amount of outstanding repo trades was about $5,000bn while average daily trading volumes were running at almost $800bn - more than double their level seven years previously.
The market is heavily dominated by the biggest banks, particularly the designated primary dealer banks - those who deal directly with the Federal Reserve and make markets in Treasury securities.
"There was some frustration with the existing market structure, where you choose between electronic and voice trading," said Philip Norton, head of e-commerce for BGC. "[Repo] is a complex market with high volumes needing fast execution and trade processing."
By combining voice and electronic trading, both brokers are hoping to offer deeper pools of liquidity while still giving their customers the choice.
"If customers want to post prices, they can either call in and ask a broker to do it, or they can put it in themselves - there will be no difference to how it appears on the screen," said Mr Norton.
Repo market participants have generally warmed to the anonymity offered by electronic trading. Some segments of the market, such as trading in overnight "specials," which is heavily commoditised and offers low spreads for traders to take advantage of, have quickly gravitated online while others, such as longer-dated "term" repos that often involve more bespoke elements, are still largely voice-brokered.
BGC's integrated platform will allow primary dealers to process repos in overnight and term specials, Treasury bills, and off-the-run Treasuries either electronically or by phone. The broker plans to roll out trading in other repo asset classes such as general collateral and mortgage-backed securities.
The Treasury repo market has come under scrutiny this year after a series of protracted "fails" spurred the Treasury to consider ways to provide extra liquidity in times of stress, perhaps through a "last resort" lending facility.
When a security is not lent or returned as agreed, itconstitutes a market "fail." While a number of these happen each day and are considered a natural part of the market, there has been a rise in the number of episodes of long-running fails. |
