Electronic Repo Trading Takes a Turn in the Spotlight
By: Joanne Crisafi, Managing Director, U.S. Institutional Repo and Money Markets
Colleen Flynn, Director, U.S. Institutional Repo and Money Markets
You know the world is changing when the repo market suddenly gets its own daily feature on Reddit. That’s exactly what happened last year when a confluence of once-in-a-lifetime events, including the pandemic, massive federal stimulus and record low interest rates, helped drive the daily balance of the Fed’s reverse repo facility up over the $1.8 trillion mark.
Suddenly, this specialized corner of the institutional markets was being tracked in a daily reverse repo update that became one of Reddit’s most popular pages, and money market funds were investing upwards of 30% of their portfolios with the Fed. And it hasn’t slowed down. With yields on short-term paper persistently hovering close to zero or below throughout the year and the buy-side continually on the hunt for yield, the repo market has continued to be a focal point, with the Fed’s reverse repo average daily balance holding at around $1.4 trillion for most of the year.
Electronic Trading Helps to Drive Surge
Throughout this star turn for the repo market, electronic trading volumes have also skyrocketed. One of the last bastions of old-fashioned phone, chat and yelling across the trading floor methods of trading, the repo market had historically been slower to embrace electronic markets. Throughout 2021, average daily repo volume across Tradeweb was $336.8 billion.
While the same combination of crazy events that drove the growth in repo activity helped contribute to the growth of electronic repo trading, there have also been some corroborating factors that have helped fuel the electronic repo revolution. Sure, the fact that market participants were largely working from home and could no longer rely on in-person interactions played a role, but once these market participants started seeing the benefits of features like integrated audit trails, straight-through-processing and instant access to liquidity, the benefits of electronic workflows got harder to ignore.
Post-Trade Benefits Too Big to Ignore
For market participants trading globally, these benefits became even more pronounced in July of 2020 when the European Securities and Markets Authority (ESMA) officially implemented the Securities Financing Transactions Regulation (SFTR), which requires counterparties to report their transactions to a trade repository registered with ESMA. Given the high number of repo trades executed daily and the demands of the new regulation, clients trading electronically quickly gained an appreciation for the fact that the entire audit trail was automatically built into the process.
If the pandemic and ensuing market surge was the gateway to electronic repo trading, this streamlined post-trade functionality has served as the addictive potion that keeps them coming back, even after markets begin to normalize. For our part at Tradeweb, we have been consistently enhancing our institutional electronic repo platform to keep market participants hooked. By continually improving workflows with a new user interface that better connects the buy-side to the dealer community and cross-market trading capabilities that make it possible to trade repo alongside Treasuries and other fixed income assets, we are starting to see a clear shift in preference toward electronic platforms.
While it’s impossible to forecast how long these repo volumes we’ve been seeing over the past two years will last, we believe that we’ve reached an inflection point for electronic repo trading. The fact that volumes on our platform have continued to grow each month, even after most market participants have returned to their trading desks, is a testament to the evolution of repo markets. As regulatory reporting requirements become increasingly more rigorous and more market participants continue to leave no stone unturned in the quest for yield, we believe electronic repo trading will keep gaining momentum and we will keep enhancing the tools of the trade.
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