Repo panel
21 January 2025
Industry participants assess the landscape of the repo market globally, discussing the impacts of the US Treasury Clearing mandate, the application of modern technology, and positioning for growth
Image: stock.adobe.com/nakarin
Panellists
Julien Berge, Head of Fixed Income and Repo Trading, CACEIS
Nick Chan, Head of Financial Resources, BMO
Ruth Ferris, Head of Financing Asia, MUFG
Jon Ford, Head of Fixed Income Business Development, Pirum
Carsten Hiller, Head of Repo Sales Europe, Eurex
Olivia Russell, Vice President, Sales, GLMX
Joseph Torpey, Managing Director, Head of Secured Financing Trading, State Street
How do you assess the performance of the repo market over the past 12 months? What have been some of the key trends and core lessons learned during this period?
Nick Chan: Repo Markets have been resilient over the past 12 months amid a backdrop of extended rates volatility and geopolitical stress. While the ongoing cheapening of repo rates against the risk-free rate (RFR) was expected, the lack of term premium build up for non-government assets was the most confounding development through the year. Volatility around key reporting dates further illustrated the constraints of the sell side to facilitate repo activity. Lastly, the electronification of the repo market is marching forward with more flow transitioning to trading platforms (dealer-to-client and dealer-to-dealer) for the ease of reporting. With more high-profile technology outages and cyber-related incidents observed across the market, the need for strong recovery processes and overall operational resilience has been accentuated.
Joseph Torpey: Repo market performance has been outstanding, and the resilience of participants continues to impress. The amount of liquidity generated daily at very efficient levels with the flows we have seen on both the cash investor and borrower sides of the trade is a testament to the structure of this market. As far as trends and lessons are concerned in 2024, we鈥檝e learned how critical it is to really stay in front of clients and differentiate our offering. Clients have many options, so staying at the forefront of market developments and earning their trust so that we can deliver on their needs is important, no matter how the macro environment is shaped.
Olivia Russell: The repo market has been extremely robust over 2024 with growth in outstanding balances continuing the trend of recent years. Statistics from the Securities Industry and Financial Markets Association (SIFMA) show an 18.5 per cent increase year-on-year (YoY) in 2024. The International Capital Market Association (ICMA) European Repo Survey, published in November 2024, showed YoY growth of 4.9 per cent. This growth has been facilitated, in part, by the rapid electronification of the market, particularly in the dealer-to-client (D2C) segment. At GLMX, we鈥檝e experienced continued powerful growth with average daily volume up 78 per cent YoY to US$1.08 trillion and average daily balance up 55 per cent to US$2.9 trillion in Q4. This year has seen the expansion and diversification of participants trading electronically, as the market evolves from large early adopters to a broad constituency of firms. We have also seen a rapid acceleration of electronic trading in Asia.
Ruth Ferris: Over the past 18 months, we have seen a shift of balance sheet capacity from the traditional European markets to more trading in the US and Asian markets 鈥� this has led to an increase in borrowing of US Treasuries and Japan government bonds (JGBs) for the first part of 2024.
The US market continued to grow, this reflected the market sentiment when the Fed started to cut interest rates and soften financial conditions, high yields and a reported growth in Treasury auction sizes of average 23 per cent across the yield curve. This growth in the supply caused a shift away from other fixed income assets as investors changed their strategies towards Treasuries.
In July 2024, the Japanese yen dominated the major currencies. This was mainly due to the Bank of Japan's intervention to support the local currency against excessive weakness, as well as the accelerated unwinding of carry yen trades due to increasing speculation about additional Japanese interest rate hikes. The USD/ JPY carry trade no longer made sense, with Japan鈥檚 rates rising and US rates likely to fall.
On the back of high yields, future rate cut expectations, increased supply of new gilts, and the UK July general election results, the market share of sterling improved.
In Europe, French and German government securities were impacted by political uncertainty around the elections and their fiscal implications, while 'traditional' safe assets suffered from heavy government bond issuance and bullish bond yield expectations.
There has been a significant shift from collateral scarcity to collateral availability and we have seen repo rates start to normalise. We expect that this will continue in 2025, mainly due to the expected high net issuance forecast. It鈥檒l be interesting to see how the market reacts to the increased liquidity and how pricing is affected.
In triparty repo, we saw counterparties looking further down the curve towards AA and A-rated assets and away from AAA-rated securities. There has also been an increased focus on interoperability between systems, triparty agents and general efficiencies.
The growth in D2C business across automated repo trading systems continues, mainly driven by the demand for cost and operational efficiency through automation.
Jon Ford: The overall repo industry has been a tough trade with mixed performance, shifting sentiment, marginal basis and no consistent trends. For portfolio managers, that meant a tougher market to make money in, but that didn鈥檛 deter from trading as volumes continued to grow.
Julien Berge: 2024 was characterised by a wealth of unclear factors within an uncertain environment. Despite this uncertainty, inflation rates are on their way down to meet the two per cent target. During the year, the European Central Bank (ECB) lowered its base rate three times, totalling 75 basis points. The monetary easing process is expected to continue and further strengthen in 2025.
Looking at the repo market, it was again notably dynamic. However, the growth in volumes seems to be slowing or at least stabilising. In times of uncertainty, we saw a number of players needing to reallocate short-term financing and transfer to the repo market at the end of Q1 2024, particularly for money market funds. Even in a complicated macroeconomic and geopolitical situation, the repo market was relatively stable.
Preparations for the end-of-year transition, which began in early October, saw some panic in the markets, and the implied spreads for core euro government bonds reached euro short-term rate (鈧琒TR) +120 and 鈧琒TR +300 for peripherals such as Italy. Nevertheless, spreads were trading at the general collateral (GC) level during the final week of the year. Even the dollar, which usually benefits from an end-of-year premium, has remained unflustered. With this calmer backdrop, there are currently no liquidity problems due to a substantial excess liquidity amount of some 鈧�2.9 trillion being available. The market has changed from a collateral shortage situation to today鈥檚 overabundance. One of the principal factors causing this is the increasing need for financing led by government deficits.
Carsten Hiller: Over the past year, the repo market has transitioned from 'cash chasing for collateral' to 'collateral chasing for cash'. This shift was driven by central banks' actions, including interest rate adjustments and quantitative tightening. The repayment of the ECB's targeted longer-term refinancing operation (TLTRO) loans and cessation of reinvestments had a significant impact on market dynamics. Quantitative tightening reduced liquidity, which led to tighter financial conditions, affecting the availability and cost of collateral.
Key trends for the year included liquidity decline 鈥� excess liquidity in the eurozone declined significantly, impacting repo demand and collateral pricing. In addition, the accessibility of high-quality liquid assets (HQLAs), such as German bunds, became more accessible, leading to normalised pricing. The increased supply of collateral from central bank actions made it cheaper and easier to obtain, although demand for HQLA remains high due to regulatory requirements.
Reflecting on the past 12 months and the core lessons learned during this period, the repo market has demonstrated its resilience in managing liquidity under evolving conditions, even as central bank support diminishes. Further, clearing has proven to enhance market resilience, especially during volatile periods. It provides increased transparency, reduced counterparty risk, improved balance sheet management through netting, and enhanced operational efficiencies.
Lastly, the market must continually adapt to changes in central bank policy, interest rates and collateral dynamics. The shift from reliance on central bank funding to private market mechanisms highlights the importance of flexibility.
What are the current hurdles facing the repo market, and how is your firm working to help clients combat barriers? What are the core drivers of this market?
Ford: Post-trade inefficiency continues to burden the industry with high fails rates and inefficient flow of collateral, resulting in stubbornly high fail costs and higher capital costs. Higher interest rates have exacerbated operational costs, making operational and capital efficiency a high priority at many banks. Our products are specifically designed to tackle these costs by reducing the risk of fails, fines, and improving collateral mobility and efficiency for both individual desks and multi-business, as well as regional enterprises.
Russell: Record sovereign debt loads have led to increasing reliance on the repo and securities lending market to help manage and distribute sovereign and other forms of debt. These higher demands on the securities finance market make efficient use of technology critical. Redundancy in technology is a similarly urgent need. Some of the barriers faced in, for instance, fixed income securities lending, are human. People are unsurprisingly used to certain protocols and therefore reluctant to choose from a sea of potential technological alternatives. At GLMX, we have been developing both technology and a critical mass of the human factor 鈥� liquidity 鈥� for the securities lending market for nearly five years.
Torpey: The US Treasury Clearing mandate brings with it large hurdles, notably how does the immense anticipated volume become cleared efficiently. However, this also poses opportunities for creating balance sheet efficient solutions. How can the market adapt to grow and expand new products while keeping within regulatory guidelines and balance sheet limitations 鈥� questions which we will all grapple with in the coming year.
Berge: Like most markets, we are currently undergoing a series of operational changes, driven by regulations and the changing needs of market participants. As CACEIS is a major player in the asset servicing industry, we must ensure we can offer a range of services that are precisely adapted to the ongoing changes in our business landscape, both regulatory and operational.
We are currently looking into launching an offer for a section of our clientele that brings a repo transaction clearing service with CACEIS acting as an agent. While the offer is principally designed to reduce risk, it will also provide a framework that will enable a broader range of clients to access a market that is currently difficult or impossible to access.
Chan: The repo market is unique in the sense that it is both an investment market and a utility function. As such, rates are not the only consideration; operational setup, regulatory metrics, and client relationships are key factors. While the low margins are an ongoing challenge from an economic point of view, the operational frictions in moving collateral around to be used in the most efficient way remain a core challenge. Fragmentation of markets can be significant leading to pricing discrepancy. Having a robust operational and technological framework is essential if one is to successfully scale that activity.
Ferris: Sponsored clearing will be a significant change in the US repo market. The move represents one of the most noteworthy shifts in US capital markets for decades. There are concerns over the viability of the current deadlines, the lack of a phased approach, questions surrounding the economics of providing clearing services for Treasuries and repo to clients, and information gaps, such as from central counterparty clearing houses (CCPs) which are still developing their models to process the transactions.
Further clarification and additional regulatory activity around accounting treatment, capital requirements, and cross-asset margin offsets will ultimately indicate how the market proceeds. However, in the meantime, market participants have to plan their investment in technology to increase automation and reduce overheads for the required build-out.
Onboarding, and the know your client (KYC) process for clients, continues to be a challenge for the market 鈥� every counterparty has different requirements which makes it a very slow negotiations process, especially across jurisdictions and time zones. If there was a formalised market KYC process, whether all firms had to be a member of an association like the Wolfsberg Group or a centralised database based on the counterparty legal entity identifier (LEI) with KYC documentation available, it would benefit all market participants. Initiatives like the Common Domain Model (CDM) will encourage transparency and consistency across the market.
Market participants are looking at a global 'follow the sun' workflow, this will be progressively important as individual jurisdictions withdraw excess liquidity at different speeds. We are seeing firms set up trading hubs in the Middle East and expand into Asia in order to capture more market share and to diversify assets.
At MUFG, we have moved people internally and hired new people to set up a trading desk in Hong Kong to price during Asian hours. We are also in the process of setting up a non-JGB repo trading desk at our affiliated Japanese entity, Mitsubishi UFJ Morgan Stanley.
Hiller: The current hurdles we see that are facing the market include reduced liquidity, cost pressures, and the ECB鈥檚 new operational framework.
Central bank tightening has led to reduced liquidity, with the ECB transitioning to an 'ample reserves' policy. This has made it more challenging for market participants to access funding. While rising costs of collateralised lending, particularly for non-bank participants, have led to financial pressures. Higher borrowing costs, especially for longer-term funding, are limiting access for some participants, which is growing demand for net stable funding ratio (NSFR) compliant transactions, eg term repo with evergreen structures.
The change to the ECB鈥檚 operational framework, announced in March and effective from September 2024, reduced the spread between the main refinancing operations (MRO) rate and the deposit facility rate from 50bps to 15bps. There are mixed views on the impact this will have on the repo market. Some see this kind of cheap money from the central bank as a threat to the repo market, while others believe it will not have a major impact, as 15bps is still a significant spread in the repo market.
To combat barriers, Eurex introduced the GC Pooling Green Bond Basket, expanded collateral eligibility, and enhanced settlement options, including TARGET2-Securities (T2S) settlement in central bank money. These innovations aim to improve market efficiency and accessibility. These include evergreen repo contracts to address Basel III NSFR challenges and provide long-term funding certainty.
Furthermore, Eurex significantly enhanced its settlement offering by supporting repo settlement of core European repo markets at Clearing Banking Frankfurt (CBF) in T2S. Eurex鈥檚 clients now have the unique capability to settle their euro GC Pooling and euro single ISIN repos in central bank money at a single central securities depository (CSD), which should enable balance sheet netting as well as more efficient cash and collateral management. We believe this initiative will also help to alleviate some of the expected challenges from the implementation of T+1 settlement for cash bond markets.
Key drivers of the repo market include central bank policies and regulatory requirements (adjustments of which can have a direct impact on liquidity and collateral availability), the demand for liquidity management solutions, and increased private market participation.
How are you positioning yourself to capture new opportunities for growth within this market? Which emerging markets are showcasing an interest to further its development?
Torpey: Our predominant business is in our global sponsored repo trading franchise, which is where all the hype exists. Therefore, we鈥檒l be keeping our eyes open and our heads on swivels. Listening to the needs of clients is always at the forefront of capturing creative opportunities for growth. Building on our initial offering, we continue to grow into all aspects of secured financing, making overnight and term markets on both sides of the trade and adding additional asset classes.
Also, our peer-to-peer programme housed on Venturi took off in 2024 and we expect continued growth there. Moving outside of the US, we see strong emerging opportunities globally and are expanding our sponsored repo programme into EMEA and APAC. We have also invested in an innovative enhanced clearing service in collaboration with another EMEA-based CCP. State Street has always been a leader in jurisdictional expansion and educating the broader market is something we take pride in.
Russell: Securities finance in general, and repo in particular, continue to drive business growth for our clients globally. In many ways, these markets are benefiting from an electronically enabled market, ramping up with new functionality and counterparties at speed. Aside from geographical expansion, we are also excited to be supporting new trade flows. We see a huge opportunity to support systematic credit business as it grows and looks for new financing solutions, as well as emerging markets flow, which can disproportionately benefit from intelligent and connected funding networks.
Ford: Certainly, AI has been the buzzword of 2024, and this will only accelerate in 2025. As a tech firm, AI will unleash a host of new possibilities for improving overall post-trade efficiencies as well as analytics and visibility. We have developed, and continue to develop, data and analytics tools to leverage this trend, and enable firms to discern valuable insights, like the 鈥榯rue cost of trade鈥�, that will enable better-informed trading, as well as improve operational and capital efficiencies.
Hiller: In terms of positioning for growth, Eurex has significantly expanded buy side participation, granting a total of 22 new licenses in 2023-24, including the onboarding of non-bank institutions such as pension funds and insurance companies. This expansion aims to increase market liquidity and diversity.
Eurex is continuously expanding its product offerings to meet evolving needs. This includes the introduction of new collateral types, the expansion of trading terms, and the development of innovative products such as the Green Bond Basket. The introduction of this product, and other innovative products, highlights Eurex鈥檚 market leadership and commitment to sustainable finance.
We see a growing interest in sustainable finance, which presents growth opportunities in the green bond repo market. Eurex's initiatives in this area align with broader market trends towards sustainability.
Looking at emerging markets of interest, Italy is important to mention. Increased activity on the Eurex Repo markets, particularly with Italian BTPs, reflects growing interest from Italian clients. This trend is partly due to the repayment and maturity of TLTROs, which require the refinancing of released collateral.
Berge: The repo and securities finance market is currently on a positive track in Europe and 2025 should see its share of new developments, particularly in the Spanish market, which is set to derestrict securities lending transactions for undertakings for collective investment in transferable securities (UCITS) early this year. The market has been waiting for this development for more than a decade. Overall, the growth drivers for Europe are looking strong and CACEIS is ready to bring an in-depth securities lending experience to our Spanish clientele.
Emerging markets are also an area that offers interesting growth prospects and for CACEIS, our asset servicing business across South America offers even more commercial development opportunities that we are looking to capitalise on.
The US Treasury clearing mandate is set to impact the repo market come June 2026. How do you anticipate this rule will shape the future of the repo market? What other regulatory initiatives look to consume your attention in this respect?
Ford: Technology will be critical to ensuring adherence to the new clearing rules, especially as what we will see in 2025 is an acceleration in the globalisation of clearing. From assessing transaction eligibility, determining access models, pricing in initial margin and variation margin, allocating higher costs, segregating margin, determining balance sheet and liquidity impact, and tracking contingent risk. Banks are going to need to up their tech game and organise their underlying trade data to be able to scale and leverage global clearing opportunities.
Berge: Clearing financial transactions is not a new concept, however in the US, the repo market historically had very little if any clearing. According to recent figures from the US Securities and Exchange Commission (SEC), 80 per cent of transactions are still carried out bilaterally. On the other hand, in Europe, more than 40 per cent of repo transactions are cleared. The vast majority of the remaining bilateral transactions involve very short maturities, often overnight, and are mainly focused on French debt.
Clearing repos on American debt will significantly impact the cost of certain arbitrage operations known as 鈥榖asis trades鈥�, which happened in 2022 and 2023, creating a liquidity issue and an increase in the cost of repo on US Treasuries. Such strategies are also more difficult to replicate in Europe on French or German debt, where the level of repo for these debts is half that of the US.
The key objective of clearing repo transactions on US debt is to better manage all flows and players operating in this market. This is designed to avoid a whiplash effect in certain areas and to prevent situations where artificial liquidity needs arise, leading to an unjustifiable increase in the demand for liquidity.
The US regulator has been on a course of modernisation, as seen in the move to T+1 settlement, and it is now focussing on repo transaction clearing.
At the same time, the European market鈥檚 Central Securities Depositories Regulation (CSDR) is being assessed by the European Securities and Markets Authority (ESMA), which will publish a report on 17 January 2025 regarding a possible shortening of the settlement cycle.
Torpey: The clearing mandate will be the main influencer in the future of repo markets. New clearing agencies coming in and new models like agent clearing or a done away service, and the take up of those, will be how the market is shaped. We are only at the beginning of this journey, but the market must be prepared and participants will find value and create opportunity in pockets 鈥� that we are sure of.
Russell: There are a number of questions still to be answered on mandatory clearing, and the market as a whole will benefit from increasing clarity. As the business models covering 鈥榙one away鈥� versus 鈥榙one with鈥� business are made clear, we look forward to serving all trade flows and protocols demanded by the market, as we have done since we started. The market has been well-served by an open and accessible ecosystem of trade infrastructure, where participants can benefit from the best of all platform features. We look forward to seeing this dynamic continue.
Chan: The US Treasury clearing mandate is arguably one of the more transformative market changes to be introduced in recent times, and the magnitude of it together with market structure impacts should not be underestimated. It will impact everyone from front office (pricing), middle office (booking), and back office (settlement), and the presence of multiple clearing access models, including agency and sponsored clearing, and (potentially) multiple CCPs will add up to shape the complexity profile of such change.
This will also concentrate clearing and settlement risk in a few key CCPs. The additional cost of collateral contribution for default fund and margining practices is another open question and it is not clear yet who will bear this cost 鈥� haircuts from CCPs are materially different than the ones applied by banks. All industry participants are watching this space carefully (even those not involved in US Treasury) as there is a reasonable expectation that local regulators may consider similar developments for their domestic markets.
Hiller: The mandate will likely drive a significant increase in the clearing of US Treasury repo transactions, improving market transparency and efficiency. Potential consolidation among clearing houses may occur as smaller players face challenges in scaling to meet new regulatory requirements. Larger, more established firms will be better positioned to compete.
Furthermore, the landmark decision of the SEC on mandatory clearing for US Treasuries has a number of implications for European repo markets going forward. The wide range of clearing house access models required to cater to the broad range of market participants impacted should enhance familiarity and acceptance of these models. Similarly, there will be renewed conversations around risk management in government bond repo where the practice of margining/haircuts is absent in certain repo market segments today. Finally, the US developments will promote discussion on the need for similar measures for European government bond cash and repo transactions in the EU, notwithstanding the differences in market structure.
Other regulatory initiatives set to impact the market include Europe鈥檚 move to a T+1 settlement. The transition to a shorter settlement for cash and derivatives markets presents both challenges and opportunities. Eurex is actively working to ensure a smooth transition and to minimise disruption to market operations.
Secondly, the implementation of cross-margining across asset classes, including repo, is expected to improve capital efficiency and reduce costs for market participants. Eurex's move towards a unified Prisma risk methodology by the end of 2025 aims to support these regulatory changes.
Ferris: In addition to the change in the US repo market with sponsored repo, we know that from June 2025, the NSFR required stable funding (RSF) factors applied to short-term (less than six months) securities financing transactions will align to Basel standards. This will increase the RSF factors of transactions secured by Level 1 HQLA from 0 per cent to 10 per cent. This will not only have a cost impact but will also mean that Europe is misaligned with other markets where it doesn鈥檛 apply, particularly the US, Japan, and Australia.
The UK and EU markets will continue their assessments in shortening the settlement cycle to T+1 and I believe we鈥檒l see significant development in repo transactions involving digital cash, digital securities and tokenisation of traditional securities
What investments and adaptations to technology and working practices have you made during 2024 to advance the use of repo? In terms of modern technology such as DLT, what is the stability of its future incorporation in repo?
Russell: Innovation is alive and well in the repo market! In fact, we see our repo clients driving and supporting new business models for their firms. GLMX is looking very carefully at the application of developing technologies to assist and empower our customers. As always, we believe that the market will define the adoption of new technologies, based on those technologies鈥� ability to deliver solutions to pressing business needs.
One of the most exciting innovations is not a breakthrough, but a crossover. We are witnessing the ongoing convergence of financing and funding markets, as market participants connect their funding business with financing needs and opportunities. We see this most directly as the repo business intersects with the securities lending and swaps markets, but this will be impactful across all of securities finance.
Berge: Ongoing technology investment is essential. Automation of flows and speed of execution are key to delivering a high-quality service. The constant operational changes in the market push us to seek out new solutions. The advent of AI and blockchain offers new opportunities for us to modernise and enhance our trading environment, and they will also play a role in streamlining flows and reducing potential errors.
There are many trials currently running within the Eurosystem, and blockchain permits intraday repos to be performed in a few hours by paying interest per minute. CACEIS is deeply involved in European trials of distributed ledger technology (DLT) systems for transactions (reception and transmission of orders on specific exchanges) and custody of cryptoassets, virtual assets and tokenised investments, and has obtained status as a registered digital or virtual asset service provider in both France and Spain.
As we, and the industry as a whole, adopt these new technologies in the near future, they will no doubt bring many efficiency benefits to the markets and open up new opportunities for us to support our clients鈥� growing businesses.
Ford: Fundamentally, the repo industry is on a trajectory of data organisation and automation. For the last three to four years, automation of execution has been the primary area of focus for many banks, with internal order management systems built to centralise flow from e-trading systems, chats and voice. But as bank c-suite and regulator focus is increasingly on post-trade and operational efficiency to reduce operational costs and ensure resilient financial markets, respectively, the capture and optimisation of post-trade data, collateral, and liquidity will be key themes for 2025 and beyond.
Overlaid with emerging technology such as DLT and AI, the complexity of global financial markets, the industry and the organisational structures of its participants will change dramatically. Data capture, digitalisation and automation will lead this transformation and result in a sharp divide between leaders (those who embrace automation and therefore reap the rewards in insight, efficiency, and P&L) and laggards (those who remain attached to outdated technology and inefficient processes, and consequently pay the price).
Torpey: We continue to invest in our technology. We are currently running our largest repo book in history and we simply could not without our technology investments. Our client-facing Fund Connect portal for cash investors continues to be efficient and we have improved reporting times for various clients across multiple time zones. Our peer-to-peer repo trading platform, Venturi, allows clients to negotiate directly in real time, has been streamlined, and is easier to use as evidenced by the uptake in late 2024.
Specific to DLT, there continues to be operational and latency efficiencies to be had so I do think firms will continue to invest in order for intraday repo to become a real tool for intraday liquidity and cash flow management.
Hiller: There are two main areas where we have been working to advance the use and incorporation of repo, those being settlement improvements and new technologies.
In terms of settlement improvement, collateral eligibility was notably increased by introducing Italian CCTs. Furthermore, T2S-eligible bonds from Slovakia, Ireland, and Slovenia were re-introduced to GC Pooling. Eurex also extended its settlement offering by supporting repo settlement of core European repo markets at CBF in T2S.
In addition, further enhancements were made to GC Pooling settlement processing and Eurex was able to expand the re-use opportunities for collateral receivers in GC Pooling.
For new technologies, Eurex Repo participated in a number of Eurosystem trials and experiments on new technologies for wholesale settlement of central bank money, involving CCP-cleared and non-CCP-cleared initiatives, as well as hybrid and native digital securities. This approach aims to ensure Eurex Repo remains at the forefront of innovation and market development, providing a resilient and efficient platform for all market participants.
How do you assess the outlook for the repo market for 2025?
Chan: Repo rates globally have ticked higher in the past two years and, more interestingly, they have started to trade close to or even higher than their respective central bank target rate. This largely reflects the evolving landscape in which reserves balances are falling and the available stock of government bond collateral is growing. We expect this trend to continue in 2025 and the repo market will continue to offer attractive opportunities within the short-term interest rate (STIR) universe. However capacity will remain a limiting factor as banks will not be able to service all demands.
As we have seen more broadly across the market, the universal model of old is being replaced with a more focused, strategically aligned operating model. This more focused approach sits central to financial resource management activities which will continue to see the repo product extended to selected counterparties as part of a broader business relationship spanning multiple products.
Torpey: Massive liquidity flows to remain. Money market funds and other real money balances will be a key watch in this liability-driven market. I鈥檓 observing another record inflow to money market funds as I am writing this. Sponsored repo volumes will pick up as balance sheets become costly and more institutions enter the cleared space as sponsored members and sponsoring members.
The big questions are: will the Fed balance sheet unwind much further? And, where will the reserves land? The debt limit will unfortunately take up some of our time again. We will take the necessary steps and precautions for clients to trade smoothly. With the size of the US Treasury market and increased issuance after the debt ceiling is resolved, we are confident that there will be supply for the demand we are sure to see in 2025.
Ford: Volatility will drive a continued increase in activity. Despite the post-election euphoria in the US, the inflationary impact of the incoming regime will be felt by the industry. Destabilising forces in Eastern Europe and the Middle East will persist. And trillions of debt will need to be refinanced, making all of the above more topical than ever.
Russell: It is an understatement to say that there are many crosscurrents which have the potential to affect the repo market. That said, the underlying trend of robust growth seems likely to continue, in no small part to help finance and distribute the record amounts of debt in the global system. Electronification continues to advance, to the benefit of all market participants. Financing and funding segments will continue to converge, and leaders in repo businesses are seeing the value in collaborating across these segments to deliver both choice and efficiency. Repo continues to be the focus and driver of many important market relationships. These are best supported by advanced technology that supports the workflow and connectivity that the market needs.
Ferris: Traditionally, repo has remained unaffected by significant changes, regulations and development, while other markets have evolved beyond comparison. It's an exciting time for the repo market, provided market participants remain dynamic and nimble to adjust to market conditions and changes.
Berge: The depreciation of repo market levels that began in 2024 will continue in 2025, where levels should reach those of the MRO rate. The entire market will have to continue to optimise the various banking ratios, in particular the NSFR, as the exemption for financial institutions concerning operations of less than six months has not been renewed. This will likely impact short-term repos, up to 10 per cent for HQLA assets and 15 per cent for non-HQLA assets. There will also be many challenges linked to excess liquidity which is forecast to fall to 鈧�2 trillion.
Hiller: Our outlook on the market in 2025 sees continued demand. The strong demand for term repos, particularly in Europe, is expected to continue. The trend of cash chasing for collateral is likely to persist, driven by the need for efficient liquidity management.
Moreover, increased participation from buy side institutions like pension funds, hedge funds, and corporates is anticipated. These institutions will be attracted by the operational and cost efficiencies offered by cleared repo markets.
While continued advancements in technology will enhance market efficiency and resilience, Eurex's strategic focus includes introducing cross-product margining, expanding GC Pooling liquidity, and supporting market resilience in the euro capital markets.
Eurex is committed to supporting market participants in the euro-denominated repo markets by delivering superior value and navigating through both foreseen and unforeseen challenges.
Julien Berge, Head of Fixed Income and Repo Trading, CACEIS
Nick Chan, Head of Financial Resources, BMO
Ruth Ferris, Head of Financing Asia, MUFG
Jon Ford, Head of Fixed Income Business Development, Pirum
Carsten Hiller, Head of Repo Sales Europe, Eurex
Olivia Russell, Vice President, Sales, GLMX
Joseph Torpey, Managing Director, Head of Secured Financing Trading, State Street
How do you assess the performance of the repo market over the past 12 months? What have been some of the key trends and core lessons learned during this period?
Nick Chan: Repo Markets have been resilient over the past 12 months amid a backdrop of extended rates volatility and geopolitical stress. While the ongoing cheapening of repo rates against the risk-free rate (RFR) was expected, the lack of term premium build up for non-government assets was the most confounding development through the year. Volatility around key reporting dates further illustrated the constraints of the sell side to facilitate repo activity. Lastly, the electronification of the repo market is marching forward with more flow transitioning to trading platforms (dealer-to-client and dealer-to-dealer) for the ease of reporting. With more high-profile technology outages and cyber-related incidents observed across the market, the need for strong recovery processes and overall operational resilience has been accentuated.
Joseph Torpey: Repo market performance has been outstanding, and the resilience of participants continues to impress. The amount of liquidity generated daily at very efficient levels with the flows we have seen on both the cash investor and borrower sides of the trade is a testament to the structure of this market. As far as trends and lessons are concerned in 2024, we鈥檝e learned how critical it is to really stay in front of clients and differentiate our offering. Clients have many options, so staying at the forefront of market developments and earning their trust so that we can deliver on their needs is important, no matter how the macro environment is shaped.
Olivia Russell: The repo market has been extremely robust over 2024 with growth in outstanding balances continuing the trend of recent years. Statistics from the Securities Industry and Financial Markets Association (SIFMA) show an 18.5 per cent increase year-on-year (YoY) in 2024. The International Capital Market Association (ICMA) European Repo Survey, published in November 2024, showed YoY growth of 4.9 per cent. This growth has been facilitated, in part, by the rapid electronification of the market, particularly in the dealer-to-client (D2C) segment. At GLMX, we鈥檝e experienced continued powerful growth with average daily volume up 78 per cent YoY to US$1.08 trillion and average daily balance up 55 per cent to US$2.9 trillion in Q4. This year has seen the expansion and diversification of participants trading electronically, as the market evolves from large early adopters to a broad constituency of firms. We have also seen a rapid acceleration of electronic trading in Asia.
Ruth Ferris: Over the past 18 months, we have seen a shift of balance sheet capacity from the traditional European markets to more trading in the US and Asian markets 鈥� this has led to an increase in borrowing of US Treasuries and Japan government bonds (JGBs) for the first part of 2024.
The US market continued to grow, this reflected the market sentiment when the Fed started to cut interest rates and soften financial conditions, high yields and a reported growth in Treasury auction sizes of average 23 per cent across the yield curve. This growth in the supply caused a shift away from other fixed income assets as investors changed their strategies towards Treasuries.
In July 2024, the Japanese yen dominated the major currencies. This was mainly due to the Bank of Japan's intervention to support the local currency against excessive weakness, as well as the accelerated unwinding of carry yen trades due to increasing speculation about additional Japanese interest rate hikes. The USD/ JPY carry trade no longer made sense, with Japan鈥檚 rates rising and US rates likely to fall.
On the back of high yields, future rate cut expectations, increased supply of new gilts, and the UK July general election results, the market share of sterling improved.
In Europe, French and German government securities were impacted by political uncertainty around the elections and their fiscal implications, while 'traditional' safe assets suffered from heavy government bond issuance and bullish bond yield expectations.
There has been a significant shift from collateral scarcity to collateral availability and we have seen repo rates start to normalise. We expect that this will continue in 2025, mainly due to the expected high net issuance forecast. It鈥檒l be interesting to see how the market reacts to the increased liquidity and how pricing is affected.
In triparty repo, we saw counterparties looking further down the curve towards AA and A-rated assets and away from AAA-rated securities. There has also been an increased focus on interoperability between systems, triparty agents and general efficiencies.
The growth in D2C business across automated repo trading systems continues, mainly driven by the demand for cost and operational efficiency through automation.
Jon Ford: The overall repo industry has been a tough trade with mixed performance, shifting sentiment, marginal basis and no consistent trends. For portfolio managers, that meant a tougher market to make money in, but that didn鈥檛 deter from trading as volumes continued to grow.
Julien Berge: 2024 was characterised by a wealth of unclear factors within an uncertain environment. Despite this uncertainty, inflation rates are on their way down to meet the two per cent target. During the year, the European Central Bank (ECB) lowered its base rate three times, totalling 75 basis points. The monetary easing process is expected to continue and further strengthen in 2025.
Looking at the repo market, it was again notably dynamic. However, the growth in volumes seems to be slowing or at least stabilising. In times of uncertainty, we saw a number of players needing to reallocate short-term financing and transfer to the repo market at the end of Q1 2024, particularly for money market funds. Even in a complicated macroeconomic and geopolitical situation, the repo market was relatively stable.
Preparations for the end-of-year transition, which began in early October, saw some panic in the markets, and the implied spreads for core euro government bonds reached euro short-term rate (鈧琒TR) +120 and 鈧琒TR +300 for peripherals such as Italy. Nevertheless, spreads were trading at the general collateral (GC) level during the final week of the year. Even the dollar, which usually benefits from an end-of-year premium, has remained unflustered. With this calmer backdrop, there are currently no liquidity problems due to a substantial excess liquidity amount of some 鈧�2.9 trillion being available. The market has changed from a collateral shortage situation to today鈥檚 overabundance. One of the principal factors causing this is the increasing need for financing led by government deficits.
Carsten Hiller: Over the past year, the repo market has transitioned from 'cash chasing for collateral' to 'collateral chasing for cash'. This shift was driven by central banks' actions, including interest rate adjustments and quantitative tightening. The repayment of the ECB's targeted longer-term refinancing operation (TLTRO) loans and cessation of reinvestments had a significant impact on market dynamics. Quantitative tightening reduced liquidity, which led to tighter financial conditions, affecting the availability and cost of collateral.
Key trends for the year included liquidity decline 鈥� excess liquidity in the eurozone declined significantly, impacting repo demand and collateral pricing. In addition, the accessibility of high-quality liquid assets (HQLAs), such as German bunds, became more accessible, leading to normalised pricing. The increased supply of collateral from central bank actions made it cheaper and easier to obtain, although demand for HQLA remains high due to regulatory requirements.
Reflecting on the past 12 months and the core lessons learned during this period, the repo market has demonstrated its resilience in managing liquidity under evolving conditions, even as central bank support diminishes. Further, clearing has proven to enhance market resilience, especially during volatile periods. It provides increased transparency, reduced counterparty risk, improved balance sheet management through netting, and enhanced operational efficiencies.
Lastly, the market must continually adapt to changes in central bank policy, interest rates and collateral dynamics. The shift from reliance on central bank funding to private market mechanisms highlights the importance of flexibility.
What are the current hurdles facing the repo market, and how is your firm working to help clients combat barriers? What are the core drivers of this market?
Ford: Post-trade inefficiency continues to burden the industry with high fails rates and inefficient flow of collateral, resulting in stubbornly high fail costs and higher capital costs. Higher interest rates have exacerbated operational costs, making operational and capital efficiency a high priority at many banks. Our products are specifically designed to tackle these costs by reducing the risk of fails, fines, and improving collateral mobility and efficiency for both individual desks and multi-business, as well as regional enterprises.
Russell: Record sovereign debt loads have led to increasing reliance on the repo and securities lending market to help manage and distribute sovereign and other forms of debt. These higher demands on the securities finance market make efficient use of technology critical. Redundancy in technology is a similarly urgent need. Some of the barriers faced in, for instance, fixed income securities lending, are human. People are unsurprisingly used to certain protocols and therefore reluctant to choose from a sea of potential technological alternatives. At GLMX, we have been developing both technology and a critical mass of the human factor 鈥� liquidity 鈥� for the securities lending market for nearly five years.
Torpey: The US Treasury Clearing mandate brings with it large hurdles, notably how does the immense anticipated volume become cleared efficiently. However, this also poses opportunities for creating balance sheet efficient solutions. How can the market adapt to grow and expand new products while keeping within regulatory guidelines and balance sheet limitations 鈥� questions which we will all grapple with in the coming year.
Berge: Like most markets, we are currently undergoing a series of operational changes, driven by regulations and the changing needs of market participants. As CACEIS is a major player in the asset servicing industry, we must ensure we can offer a range of services that are precisely adapted to the ongoing changes in our business landscape, both regulatory and operational.
We are currently looking into launching an offer for a section of our clientele that brings a repo transaction clearing service with CACEIS acting as an agent. While the offer is principally designed to reduce risk, it will also provide a framework that will enable a broader range of clients to access a market that is currently difficult or impossible to access.
Chan: The repo market is unique in the sense that it is both an investment market and a utility function. As such, rates are not the only consideration; operational setup, regulatory metrics, and client relationships are key factors. While the low margins are an ongoing challenge from an economic point of view, the operational frictions in moving collateral around to be used in the most efficient way remain a core challenge. Fragmentation of markets can be significant leading to pricing discrepancy. Having a robust operational and technological framework is essential if one is to successfully scale that activity.
Ferris: Sponsored clearing will be a significant change in the US repo market. The move represents one of the most noteworthy shifts in US capital markets for decades. There are concerns over the viability of the current deadlines, the lack of a phased approach, questions surrounding the economics of providing clearing services for Treasuries and repo to clients, and information gaps, such as from central counterparty clearing houses (CCPs) which are still developing their models to process the transactions.
Further clarification and additional regulatory activity around accounting treatment, capital requirements, and cross-asset margin offsets will ultimately indicate how the market proceeds. However, in the meantime, market participants have to plan their investment in technology to increase automation and reduce overheads for the required build-out.
Onboarding, and the know your client (KYC) process for clients, continues to be a challenge for the market 鈥� every counterparty has different requirements which makes it a very slow negotiations process, especially across jurisdictions and time zones. If there was a formalised market KYC process, whether all firms had to be a member of an association like the Wolfsberg Group or a centralised database based on the counterparty legal entity identifier (LEI) with KYC documentation available, it would benefit all market participants. Initiatives like the Common Domain Model (CDM) will encourage transparency and consistency across the market.
Market participants are looking at a global 'follow the sun' workflow, this will be progressively important as individual jurisdictions withdraw excess liquidity at different speeds. We are seeing firms set up trading hubs in the Middle East and expand into Asia in order to capture more market share and to diversify assets.
At MUFG, we have moved people internally and hired new people to set up a trading desk in Hong Kong to price during Asian hours. We are also in the process of setting up a non-JGB repo trading desk at our affiliated Japanese entity, Mitsubishi UFJ Morgan Stanley.
Hiller: The current hurdles we see that are facing the market include reduced liquidity, cost pressures, and the ECB鈥檚 new operational framework.
Central bank tightening has led to reduced liquidity, with the ECB transitioning to an 'ample reserves' policy. This has made it more challenging for market participants to access funding. While rising costs of collateralised lending, particularly for non-bank participants, have led to financial pressures. Higher borrowing costs, especially for longer-term funding, are limiting access for some participants, which is growing demand for net stable funding ratio (NSFR) compliant transactions, eg term repo with evergreen structures.
The change to the ECB鈥檚 operational framework, announced in March and effective from September 2024, reduced the spread between the main refinancing operations (MRO) rate and the deposit facility rate from 50bps to 15bps. There are mixed views on the impact this will have on the repo market. Some see this kind of cheap money from the central bank as a threat to the repo market, while others believe it will not have a major impact, as 15bps is still a significant spread in the repo market.
To combat barriers, Eurex introduced the GC Pooling Green Bond Basket, expanded collateral eligibility, and enhanced settlement options, including TARGET2-Securities (T2S) settlement in central bank money. These innovations aim to improve market efficiency and accessibility. These include evergreen repo contracts to address Basel III NSFR challenges and provide long-term funding certainty.
Furthermore, Eurex significantly enhanced its settlement offering by supporting repo settlement of core European repo markets at Clearing Banking Frankfurt (CBF) in T2S. Eurex鈥檚 clients now have the unique capability to settle their euro GC Pooling and euro single ISIN repos in central bank money at a single central securities depository (CSD), which should enable balance sheet netting as well as more efficient cash and collateral management. We believe this initiative will also help to alleviate some of the expected challenges from the implementation of T+1 settlement for cash bond markets.
Key drivers of the repo market include central bank policies and regulatory requirements (adjustments of which can have a direct impact on liquidity and collateral availability), the demand for liquidity management solutions, and increased private market participation.
How are you positioning yourself to capture new opportunities for growth within this market? Which emerging markets are showcasing an interest to further its development?
Torpey: Our predominant business is in our global sponsored repo trading franchise, which is where all the hype exists. Therefore, we鈥檒l be keeping our eyes open and our heads on swivels. Listening to the needs of clients is always at the forefront of capturing creative opportunities for growth. Building on our initial offering, we continue to grow into all aspects of secured financing, making overnight and term markets on both sides of the trade and adding additional asset classes.
Also, our peer-to-peer programme housed on Venturi took off in 2024 and we expect continued growth there. Moving outside of the US, we see strong emerging opportunities globally and are expanding our sponsored repo programme into EMEA and APAC. We have also invested in an innovative enhanced clearing service in collaboration with another EMEA-based CCP. State Street has always been a leader in jurisdictional expansion and educating the broader market is something we take pride in.
Russell: Securities finance in general, and repo in particular, continue to drive business growth for our clients globally. In many ways, these markets are benefiting from an electronically enabled market, ramping up with new functionality and counterparties at speed. Aside from geographical expansion, we are also excited to be supporting new trade flows. We see a huge opportunity to support systematic credit business as it grows and looks for new financing solutions, as well as emerging markets flow, which can disproportionately benefit from intelligent and connected funding networks.
Ford: Certainly, AI has been the buzzword of 2024, and this will only accelerate in 2025. As a tech firm, AI will unleash a host of new possibilities for improving overall post-trade efficiencies as well as analytics and visibility. We have developed, and continue to develop, data and analytics tools to leverage this trend, and enable firms to discern valuable insights, like the 鈥榯rue cost of trade鈥�, that will enable better-informed trading, as well as improve operational and capital efficiencies.
Hiller: In terms of positioning for growth, Eurex has significantly expanded buy side participation, granting a total of 22 new licenses in 2023-24, including the onboarding of non-bank institutions such as pension funds and insurance companies. This expansion aims to increase market liquidity and diversity.
Eurex is continuously expanding its product offerings to meet evolving needs. This includes the introduction of new collateral types, the expansion of trading terms, and the development of innovative products such as the Green Bond Basket. The introduction of this product, and other innovative products, highlights Eurex鈥檚 market leadership and commitment to sustainable finance.
We see a growing interest in sustainable finance, which presents growth opportunities in the green bond repo market. Eurex's initiatives in this area align with broader market trends towards sustainability.
Looking at emerging markets of interest, Italy is important to mention. Increased activity on the Eurex Repo markets, particularly with Italian BTPs, reflects growing interest from Italian clients. This trend is partly due to the repayment and maturity of TLTROs, which require the refinancing of released collateral.
Berge: The repo and securities finance market is currently on a positive track in Europe and 2025 should see its share of new developments, particularly in the Spanish market, which is set to derestrict securities lending transactions for undertakings for collective investment in transferable securities (UCITS) early this year. The market has been waiting for this development for more than a decade. Overall, the growth drivers for Europe are looking strong and CACEIS is ready to bring an in-depth securities lending experience to our Spanish clientele.
Emerging markets are also an area that offers interesting growth prospects and for CACEIS, our asset servicing business across South America offers even more commercial development opportunities that we are looking to capitalise on.
The US Treasury clearing mandate is set to impact the repo market come June 2026. How do you anticipate this rule will shape the future of the repo market? What other regulatory initiatives look to consume your attention in this respect?
Ford: Technology will be critical to ensuring adherence to the new clearing rules, especially as what we will see in 2025 is an acceleration in the globalisation of clearing. From assessing transaction eligibility, determining access models, pricing in initial margin and variation margin, allocating higher costs, segregating margin, determining balance sheet and liquidity impact, and tracking contingent risk. Banks are going to need to up their tech game and organise their underlying trade data to be able to scale and leverage global clearing opportunities.
Berge: Clearing financial transactions is not a new concept, however in the US, the repo market historically had very little if any clearing. According to recent figures from the US Securities and Exchange Commission (SEC), 80 per cent of transactions are still carried out bilaterally. On the other hand, in Europe, more than 40 per cent of repo transactions are cleared. The vast majority of the remaining bilateral transactions involve very short maturities, often overnight, and are mainly focused on French debt.
Clearing repos on American debt will significantly impact the cost of certain arbitrage operations known as 鈥榖asis trades鈥�, which happened in 2022 and 2023, creating a liquidity issue and an increase in the cost of repo on US Treasuries. Such strategies are also more difficult to replicate in Europe on French or German debt, where the level of repo for these debts is half that of the US.
The key objective of clearing repo transactions on US debt is to better manage all flows and players operating in this market. This is designed to avoid a whiplash effect in certain areas and to prevent situations where artificial liquidity needs arise, leading to an unjustifiable increase in the demand for liquidity.
The US regulator has been on a course of modernisation, as seen in the move to T+1 settlement, and it is now focussing on repo transaction clearing.
At the same time, the European market鈥檚 Central Securities Depositories Regulation (CSDR) is being assessed by the European Securities and Markets Authority (ESMA), which will publish a report on 17 January 2025 regarding a possible shortening of the settlement cycle.
Torpey: The clearing mandate will be the main influencer in the future of repo markets. New clearing agencies coming in and new models like agent clearing or a done away service, and the take up of those, will be how the market is shaped. We are only at the beginning of this journey, but the market must be prepared and participants will find value and create opportunity in pockets 鈥� that we are sure of.
Russell: There are a number of questions still to be answered on mandatory clearing, and the market as a whole will benefit from increasing clarity. As the business models covering 鈥榙one away鈥� versus 鈥榙one with鈥� business are made clear, we look forward to serving all trade flows and protocols demanded by the market, as we have done since we started. The market has been well-served by an open and accessible ecosystem of trade infrastructure, where participants can benefit from the best of all platform features. We look forward to seeing this dynamic continue.
Chan: The US Treasury clearing mandate is arguably one of the more transformative market changes to be introduced in recent times, and the magnitude of it together with market structure impacts should not be underestimated. It will impact everyone from front office (pricing), middle office (booking), and back office (settlement), and the presence of multiple clearing access models, including agency and sponsored clearing, and (potentially) multiple CCPs will add up to shape the complexity profile of such change.
This will also concentrate clearing and settlement risk in a few key CCPs. The additional cost of collateral contribution for default fund and margining practices is another open question and it is not clear yet who will bear this cost 鈥� haircuts from CCPs are materially different than the ones applied by banks. All industry participants are watching this space carefully (even those not involved in US Treasury) as there is a reasonable expectation that local regulators may consider similar developments for their domestic markets.
Hiller: The mandate will likely drive a significant increase in the clearing of US Treasury repo transactions, improving market transparency and efficiency. Potential consolidation among clearing houses may occur as smaller players face challenges in scaling to meet new regulatory requirements. Larger, more established firms will be better positioned to compete.
Furthermore, the landmark decision of the SEC on mandatory clearing for US Treasuries has a number of implications for European repo markets going forward. The wide range of clearing house access models required to cater to the broad range of market participants impacted should enhance familiarity and acceptance of these models. Similarly, there will be renewed conversations around risk management in government bond repo where the practice of margining/haircuts is absent in certain repo market segments today. Finally, the US developments will promote discussion on the need for similar measures for European government bond cash and repo transactions in the EU, notwithstanding the differences in market structure.
Other regulatory initiatives set to impact the market include Europe鈥檚 move to a T+1 settlement. The transition to a shorter settlement for cash and derivatives markets presents both challenges and opportunities. Eurex is actively working to ensure a smooth transition and to minimise disruption to market operations.
Secondly, the implementation of cross-margining across asset classes, including repo, is expected to improve capital efficiency and reduce costs for market participants. Eurex's move towards a unified Prisma risk methodology by the end of 2025 aims to support these regulatory changes.
Ferris: In addition to the change in the US repo market with sponsored repo, we know that from June 2025, the NSFR required stable funding (RSF) factors applied to short-term (less than six months) securities financing transactions will align to Basel standards. This will increase the RSF factors of transactions secured by Level 1 HQLA from 0 per cent to 10 per cent. This will not only have a cost impact but will also mean that Europe is misaligned with other markets where it doesn鈥檛 apply, particularly the US, Japan, and Australia.
The UK and EU markets will continue their assessments in shortening the settlement cycle to T+1 and I believe we鈥檒l see significant development in repo transactions involving digital cash, digital securities and tokenisation of traditional securities
What investments and adaptations to technology and working practices have you made during 2024 to advance the use of repo? In terms of modern technology such as DLT, what is the stability of its future incorporation in repo?
Russell: Innovation is alive and well in the repo market! In fact, we see our repo clients driving and supporting new business models for their firms. GLMX is looking very carefully at the application of developing technologies to assist and empower our customers. As always, we believe that the market will define the adoption of new technologies, based on those technologies鈥� ability to deliver solutions to pressing business needs.
One of the most exciting innovations is not a breakthrough, but a crossover. We are witnessing the ongoing convergence of financing and funding markets, as market participants connect their funding business with financing needs and opportunities. We see this most directly as the repo business intersects with the securities lending and swaps markets, but this will be impactful across all of securities finance.
Berge: Ongoing technology investment is essential. Automation of flows and speed of execution are key to delivering a high-quality service. The constant operational changes in the market push us to seek out new solutions. The advent of AI and blockchain offers new opportunities for us to modernise and enhance our trading environment, and they will also play a role in streamlining flows and reducing potential errors.
There are many trials currently running within the Eurosystem, and blockchain permits intraday repos to be performed in a few hours by paying interest per minute. CACEIS is deeply involved in European trials of distributed ledger technology (DLT) systems for transactions (reception and transmission of orders on specific exchanges) and custody of cryptoassets, virtual assets and tokenised investments, and has obtained status as a registered digital or virtual asset service provider in both France and Spain.
As we, and the industry as a whole, adopt these new technologies in the near future, they will no doubt bring many efficiency benefits to the markets and open up new opportunities for us to support our clients鈥� growing businesses.
Ford: Fundamentally, the repo industry is on a trajectory of data organisation and automation. For the last three to four years, automation of execution has been the primary area of focus for many banks, with internal order management systems built to centralise flow from e-trading systems, chats and voice. But as bank c-suite and regulator focus is increasingly on post-trade and operational efficiency to reduce operational costs and ensure resilient financial markets, respectively, the capture and optimisation of post-trade data, collateral, and liquidity will be key themes for 2025 and beyond.
Overlaid with emerging technology such as DLT and AI, the complexity of global financial markets, the industry and the organisational structures of its participants will change dramatically. Data capture, digitalisation and automation will lead this transformation and result in a sharp divide between leaders (those who embrace automation and therefore reap the rewards in insight, efficiency, and P&L) and laggards (those who remain attached to outdated technology and inefficient processes, and consequently pay the price).
Torpey: We continue to invest in our technology. We are currently running our largest repo book in history and we simply could not without our technology investments. Our client-facing Fund Connect portal for cash investors continues to be efficient and we have improved reporting times for various clients across multiple time zones. Our peer-to-peer repo trading platform, Venturi, allows clients to negotiate directly in real time, has been streamlined, and is easier to use as evidenced by the uptake in late 2024.
Specific to DLT, there continues to be operational and latency efficiencies to be had so I do think firms will continue to invest in order for intraday repo to become a real tool for intraday liquidity and cash flow management.
Hiller: There are two main areas where we have been working to advance the use and incorporation of repo, those being settlement improvements and new technologies.
In terms of settlement improvement, collateral eligibility was notably increased by introducing Italian CCTs. Furthermore, T2S-eligible bonds from Slovakia, Ireland, and Slovenia were re-introduced to GC Pooling. Eurex also extended its settlement offering by supporting repo settlement of core European repo markets at CBF in T2S.
In addition, further enhancements were made to GC Pooling settlement processing and Eurex was able to expand the re-use opportunities for collateral receivers in GC Pooling.
For new technologies, Eurex Repo participated in a number of Eurosystem trials and experiments on new technologies for wholesale settlement of central bank money, involving CCP-cleared and non-CCP-cleared initiatives, as well as hybrid and native digital securities. This approach aims to ensure Eurex Repo remains at the forefront of innovation and market development, providing a resilient and efficient platform for all market participants.
How do you assess the outlook for the repo market for 2025?
Chan: Repo rates globally have ticked higher in the past two years and, more interestingly, they have started to trade close to or even higher than their respective central bank target rate. This largely reflects the evolving landscape in which reserves balances are falling and the available stock of government bond collateral is growing. We expect this trend to continue in 2025 and the repo market will continue to offer attractive opportunities within the short-term interest rate (STIR) universe. However capacity will remain a limiting factor as banks will not be able to service all demands.
As we have seen more broadly across the market, the universal model of old is being replaced with a more focused, strategically aligned operating model. This more focused approach sits central to financial resource management activities which will continue to see the repo product extended to selected counterparties as part of a broader business relationship spanning multiple products.
Torpey: Massive liquidity flows to remain. Money market funds and other real money balances will be a key watch in this liability-driven market. I鈥檓 observing another record inflow to money market funds as I am writing this. Sponsored repo volumes will pick up as balance sheets become costly and more institutions enter the cleared space as sponsored members and sponsoring members.
The big questions are: will the Fed balance sheet unwind much further? And, where will the reserves land? The debt limit will unfortunately take up some of our time again. We will take the necessary steps and precautions for clients to trade smoothly. With the size of the US Treasury market and increased issuance after the debt ceiling is resolved, we are confident that there will be supply for the demand we are sure to see in 2025.
Ford: Volatility will drive a continued increase in activity. Despite the post-election euphoria in the US, the inflationary impact of the incoming regime will be felt by the industry. Destabilising forces in Eastern Europe and the Middle East will persist. And trillions of debt will need to be refinanced, making all of the above more topical than ever.
Russell: It is an understatement to say that there are many crosscurrents which have the potential to affect the repo market. That said, the underlying trend of robust growth seems likely to continue, in no small part to help finance and distribute the record amounts of debt in the global system. Electronification continues to advance, to the benefit of all market participants. Financing and funding segments will continue to converge, and leaders in repo businesses are seeing the value in collaborating across these segments to deliver both choice and efficiency. Repo continues to be the focus and driver of many important market relationships. These are best supported by advanced technology that supports the workflow and connectivity that the market needs.
Ferris: Traditionally, repo has remained unaffected by significant changes, regulations and development, while other markets have evolved beyond comparison. It's an exciting time for the repo market, provided market participants remain dynamic and nimble to adjust to market conditions and changes.
Berge: The depreciation of repo market levels that began in 2024 will continue in 2025, where levels should reach those of the MRO rate. The entire market will have to continue to optimise the various banking ratios, in particular the NSFR, as the exemption for financial institutions concerning operations of less than six months has not been renewed. This will likely impact short-term repos, up to 10 per cent for HQLA assets and 15 per cent for non-HQLA assets. There will also be many challenges linked to excess liquidity which is forecast to fall to 鈧�2 trillion.
Hiller: Our outlook on the market in 2025 sees continued demand. The strong demand for term repos, particularly in Europe, is expected to continue. The trend of cash chasing for collateral is likely to persist, driven by the need for efficient liquidity management.
Moreover, increased participation from buy side institutions like pension funds, hedge funds, and corporates is anticipated. These institutions will be attracted by the operational and cost efficiencies offered by cleared repo markets.
While continued advancements in technology will enhance market efficiency and resilience, Eurex's strategic focus includes introducing cross-product margining, expanding GC Pooling liquidity, and supporting market resilience in the euro capital markets.
Eurex is committed to supporting market participants in the euro-denominated repo markets by delivering superior value and navigating through both foreseen and unforeseen challenges.
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