It’s the stuff which makes the wheels of money move, at once capable of easing or firming fiscal friction while helpng ensure that somewhere miles away from the fevered dealing rooms of the world’s financial centres, real trade happens. Like all such essential aspects to our modern existence, almost nobody understands fewer still are even vaguely aware of the vital role it plays enabling commerce.
Indeed, there was a simply surreal moment at the FESE Convention in Berlin a year ago when the Bundesbank boss Jens Weidmann offered a magnificently passionate, excoriating attack on the EU’s imbecilic plan to introduce a financial transaction tax. Wiedmann found it easy to whip the bourse bosses present in to a frenzy as they all pondered the impact on stock trading of a regressive anti-trade duty on markets. Then he went for his punchline to the effect of “if this misguided measure is implemented it will overnight kill the repo market…”
...As I recall in my general vicinity of the hall, BATS’ Mark Hemsley (ex-LIFFEr remember) was the only other figure still vigorously nodding his head in agreement as the predominance of cash equity thinking demonstrated how little Repo is appreciated.
If you haven’t done a repurchase agreement with your bond portfolio, welcome to the 99%. However, it is the sub 1% who are active in repo actually help make the banking system work - and for as long as that remains with us (even if banking itself is in long term decline) the bank business requires the transfusions, transmissions and translations of capital inherent to repo in order to keep lending.
In the broader exchange parish, the linear folks beyond cash markets have been shocked to find that swaps didn’t just leap on to SEFs overnight - but then again this was a ‘big bang’ only in the minds of the regulatory/political/consulting and media classes - who are by definition game followers, not thought leaders. Gradually the Dodd-EMIR-Frank revolution is gaining pace as users hook up and test with caution before pumping swaps electronically. Moreover, with a pancake flat yield curve thanks to QE, the desire to actually do lots of swaps is not remotely as pressing as it was back in the likes of the 1980’s when the west had things like inflation, oh and a vague hint of solvency to the banking system too.
So, if you want to look at how D-E-F is going to go, take a step back and look at that ultimate elemental DNA of modern banking, the repo. Gaze some way east and the end result is a fascinating elucidation. In Moscow and Istanbul, those shining mercantile cosmopolises straddling their respective fringes of Europe and Asia, both have Repo trading on exchange. The latest numbers from Moscow (product launched 2013) recorded 28% MoM volume growth - against a background which is, well, let’s say, not the brightest set of geopolitically driven macroeconomic fundamentals for the Motherland.
Interpolate the likes of 28% MoM volume growth and suddenly the scales ought to fall from practitioners’ eyes as they appreciate just what trust, transparency and the wonderment of CCP can do for a marketplace in the electronic age. Make no mistake, in the runes of the Repo whether via Takasbank and Borsa Istanbul or through the Moscow Exchange, the future is incredibly bright. Sooner or later the US will conclude the taper - true it will also bring the Mother, Brother, Uncle and other assorted non-legally binding relatives of a collapse in the bond market per se - but the need to shuffle financing through repo will be more essential than ever.
In the runes of repo we can easily spot the fascinating future of the post OTC marketplace. Provided we can keep the CCPs safe, the outlook is simply incredible. The exchange market is back in the 1980’s as we adapt to a renewal of the derivatives world. More excitingly, this time around, the electronic sandpit at the core of markets will enable faster adoption and greater globalised volume growth than ever. Roll on 2015 and the lure of an interest rate rise!
Patrick L Young is delighted to chair the Mondo Visione Exchange Forum November 12th in London and meanwhile adds a dose of daily pith the exchange world via http://ExchangeInvest.com.