By Cody Lott, Treasury Solutions Expert, Clearwater Analytics
As we witnessed back in 2019, the Federal Reserve will not hesitate to deploy overnight repo to provide a backstop in the event of a serious liquidity crisis. Liquidity issues of course arise when market participants want immediate access to cash. This is what happened four years ago, as funding markets seized up when New York and other states began to shut down due to the pandemic.
As prices in equities and bonds became extremely volatile, funding for spread products evaporated and only high-quality liquid assets like US treasuries were trading sporadically in the funding markets. These stresses led to the forced selling of off-the-run treasuries. However, due to regulations, banks were limited in the number of treasuries they could hold on their balance sheet. The Fed really had no choice but to provide a backstop.
While the overnight operation has not been utilised since, we are seeing a massive movement across the market to access more liquidity while trying to also obtain additional yield. As we know, asset managers continue to get squeezed on fees. As a consequence, portfolio managers, now have no choice but to negotiate fees of around 10 basis points.
However, lurking beneath all this is a more esoteric trend involving large corporates bypassing external managed portfolios, and moving their cash management operations internally. Firms like this will have no doubt experienced that the timing and nature of repos create unique reporting and accounting challenges for back-office teams. These include tracking the underlying journal entries and necessary reporting that comes with repos and their collateral, modelling the repo terms and conditions, reconciling cash movements to contractual obligations, and calculating and reporting the haircut, among others. The data underpinning this activity cannot be siloed – it needs to be shared across the business in an extremely transparent and fluid manner. Robust back-office reporting is needed to ensure accurate, timely data can be viewed and shared across the treasury/trading teams (investment decisioning and planning) and the accounting teams (income accuracy and disclosures).
For far too long now, the repo market has been considered opaque and slow moving with regards to embracing new technology. One of the main contributing factors to the illiquidity in repo markets has been the slow adoption of automation. We know that automation improves transparency, streamlines workflows and creates efficiencies for a marketplace. We saw with everyone working from home that it became more and more important to connect with the other side of the trade, which is why electronic trading in repos has really taken off since. Large corporates need to take a leaf out of the books of the electronic trading world and start modernising repo operations to provide themselves with a single and integrated view of the full trade lifecycle. Those corporates that do this successfully will undoubtedly be the ones to seek out much needed efficiencies at a time when every penny really does count.
Found this useful?
Take a complimentary trial of the FOW Marketing Intelligence Platform – the comprehensive source of news and analysis across the buy- and sell- side.
Gain access to:
- A single source of in-depth news, insight and analysis across Asset Management, Securities Finance, Custody, Fund Services and Derivatives
- Our interactive database, optimized to enable you to summarise data and build graphs outlining market activity
- Exclusive whitepapers, supplements and industry analysis curated and published by Futures & Options World
- Breaking news, daily and weekly alerts on the markets most relevant to you