New York Roundtable: The expanding role of the buy-side in cleared repo

This article has been published to commemorate the New York leg of Eurex’s repo roundtable series, which began in Frankfurt and will conclude in Vienna on October 24. As well as focusing on the European market, we look at Eurex’s buy-side access models and where these demonstrate similarities to US practices.  

A key driver in the rise of European cleared repo has been the growing presence of buy-side institutions at Eurex. Buy-side firms executed approximately 16,000 trades in 2023, with an average ticket size of €200m. Their share of outstanding volume at Eurex so far in 2024 has increased by about 15% from the same period last year. This is set to increase again, with new buy-side firms in the process of onboarding to Eurex, where they will join 15 already active firms. In total, the number of cleared repo market participants at Eurex now stands at 165.  

These market participants bring valuable diversification to the liquidity profile of cleared repo and to some extent also insulate repo activity from ECB monetary policy. As they are unable to access ECB funding programs, their presence at Eurex is a reliable one, helping to support more consistent liquidity.  

Many buy-side firms, particularly Dutch pension funds, have been drawn to Eurex cleared repo because of their obligation to post variation margin under Uncleared Margin Rules. This has created the need to access cash at quick notice — sometimes within half an hour.  

While this can sometimes be done via bilateral repo channels, this market has the tendency to seize up during times of market stress. Given the cautious approach of pension funds, the security of being able to access cleared repo during all market conditions has made clearing fees a price worth paying.  

Once they become part of the market, buy-side firms have enjoyed new operational advantages from the clearing infrastructure. These include a multilateral agreement that allows for trading with 150 banks — far higher than the 20-30 relationships that an average large buy-side firm would have in the bilateral market.  

"There are hardly any other options to access repo liquidity when it is most needed during stressed market conditions," says Frank Gast, Managing Director and Global Head of Repo Sales at Eurex.

"It is a scenario that the banks and several buyside firms themselves have prepared for over the last couple of years by joining Eurex. Buy-side firms are now able to go into our markets and trade with potentially more than 150 banks who have the ability to net their balance sheet exposures. It is really attractive as a liquidity pool."

"That is the main motivation for them to join. But at the same time, they are finding new opportunities to invest their cash."

For pension funds, which under UMR have had to grapple with a long-standing contradiction between the requirement to have fast access to cash for cash variation margin payments and their business models’ requirement to invest cash long-term for better yields, cleared repo offers additional advantages. Through reverse repo, many buy-side firms at Eurex have been able to overcome this challenge by investing their cash in GC Pooling at a considerable higher rate than in bilateral repo markets. Current EUR GC Pooling repo rates are close to or at the ECB´s deposit rate, so approximately 8–10 bps above €STR. 

Eurex’s infrastructure allows them to execute this strategy quickly and in size. Buy-side members report being able to place €5-10bn in the market within 10-20 minutes on a typical day. That process would take the best part of a morning in the bilateral market.  

Cleared repo also offers advantages to banks. Recent enhancements to the settlement infrastructure at Eurex have made repo settlement at a single CSD and on a single central bank money cash account across single ISIN and TriParty repo available. This is a significant simplification for market participants that have had to grapple with Europe’s fragmented settlement infrastructure before.  

This has opened the door to balance sheet netting of bank repo activity. With this market feature, buy-side firms have access to a more continuous trading cycle that avoids the typical month-end and quarterly-end slowdowns seen in the bilateral markets, when banks are highly conscious of the balance sheet impact of repo activity.  

Facilitating access 

In order to accommodate the buy-side, Eurex has introduced three ISA Direct models that facilitate the more challenging aspects of CCP participation. Obligations such as default fund contributions, which are a routine part of sell-side participation, are onerous if not prohibited for much of the buyside and do not fit with their business models.  

Each of Eurex’s three models is tailored to the varied profile of the buy-side. The standard ISA Direct model was designed for pension fund needs, with more efficient and reliable cash management. It also allows these participants’ sponsors (a clearing agent) to handle their default fund contributions.  

ISA Direct Indemnified is targeted at the hedge fund community, a new slice of the buy-side for Eurex cleared repo and one from which firms are in the process of onboarding.  

"This model closely resembles the FICC sponsor model, which in recent years has exploded in popularity in the US," says Frank Odendall, Head of Product & Business Development for Repo and Securities Lending.   

"Under the Indemnified model, sponsors provide a guarantee to cover their clients’ exposures in the event of a default towards the CCP. This varies from the standard ISA Direct model, which caps sponsors’ exposures. Despite the indemnity, this model also grants some balance sheet relief to the bank sponsor."

ISA Direct Light is similar to the FICC CCIT and targets cash investors. It shields clients from CCP default fund contributions and margin requirements by automatically pledging all repo collateral received on its cash investments back to the CCP. 

Taken together, these features not only demonstrate Eurex’s commitment to the buy-side and their heterogenous profile, but also its international outlook, with access models that minimize operational lift with their close resemblance to those used in other regions. Taken together, this shows that all firms are welcome to participate in an increasingly significant corner of the European market.