The market for repurchase agreements, so-called repos, will continue to undergo dynamic growth in the coming years and electronic trading platforms will play a decisive role in this.
At the same time non-electronic trading and the use of voice brokers will continue to decline in importance and therefore focus primarily on more complex product variations. This is the conclusion that management and technology consultant BearingPoint arrived at in its third survey on electronic repo trading, which the company releases today. A significant part of the survey deals with analyzing the leading competing electronic platforms: Broker Tec, EUREX Repo and the platforms of MTS Group. The results are based on a survey of over 20 repo traders, clearing and settlement experts, the company's own research and third-party surveys.
The growth of electronic trading requires further standardization
According to Frank Gast, Manager of Financial Services at BearingPoint, the biggest challenge facing the providers lies in the bundling of liquidity on the platforms in a manner that will ensure market-appropriate prices at any given time. He explains:
"Customers will only use the systems if they offer an advantage over the broker-based, non-electronic trading. The primary advantage is high trading volume, which can only be achieved through the further standardization of repo products."
According to the BearingPoint survey, the further regulation of capital markets in conjunction with Basel II, capital adequacy guidelines, and the effects of the elimination of guarantor liability in 2005 all speak for the dynamic growth of standardized trading, which reached a volume of 5.9 billion euros on the European market at the end of 2005. Electronic platforms currently handle nearly 25 percent of European repo trading volume. The further growth of this share would require additional investment in customer-friendly processes and making trading conditions more attractive. According to the study the investment costs for participation in the repo market are in part a significant barrier to the expansion of new customer business.
Banks lack in part the technical prerequisites for fully electronic repo trading
"Banks will also have to optimize their technical infrastructure if they want to be able to efficiently and cost-effectively use electronic money market trading as a profitable source of refinancing," says Peter Schurau, senior vice president of BearingPoint GmbH in Germany, and responsible for the Financial Services practice in Europe."
Schurau continues: "We determined that small and midsize banks in particular lack the electronic interfaces for standardized money market trading that would enable real straight-through processing. To expand repo trading into an efficient liquidity control tool would in part require considerable investment on the demand side, Schurau added."