The Changing Role of the Repo Trader

THE KNOWLEDGE XXXXXXXXXXX FEATURE

The Changing Role of the Repo Trader The day to day role of the repo trader has changed rapidly in the past 10 years, driven by a number of market and regulatory trends. More radical change is on the horizon with the advent of artificial intelligence, machine learning, and predictive analytics.

BY JEROME CARDON, REPO PRODUCT MANAGER, BROADRIDGE MARTIN SEAGROATT, GLOBAL MARKETING DIRECTOR, SECURITIES FINANCING AND COLLATERAL MANAGEMENT, BROADRIDGE

irst, the continuing low interest towards trading via electronic platforms. between how each broker presents data rate environment, coupled with This increase in electronic trading has through its user interface, creates major a long list of regulations that occurred in combination with a growing inefficiencies and can result in missed increase the cost of trading (e.g. overlap of electronic repo markets, good- trading opportunities; traders need to leverage ratio, capital costs, SFTR to-trade brokerage platforms such as LSEG’s rapidly identify and quote prices across Fto name but a few) resulted in a multiple markets in seconds, rather squeeze on the profitability of the than wasting valuable minutes repo desk. Those running the repo surveying multiple venues trying to function found they were suddenly make sense of heterogeneous data. required to do more with less, so efficiency gains, particularly through The increased scope of technology, became a key focus as a the repo desk way to improve margins. Another major trend is the Moreover, following the LIBOR convergence between global scandal, it became apparent that OTC inventory management and trade voice based trading, driven by an execution. Basel III regulation opaque web of market relationships and the direct link it has created was a source of regulatory risk for between capital and funding has market participants. This led to a made repo a critical instrument in desire among market participants and managing down the cost of other regulators for more electronic trading, activities, directly in the case of offering greater transparency and derivatives activities, or indirectly audit trails of activity, and reducing for hedges. This means the desk the scope for collusion. It also provides frequently involves disciplines more visible proof of best execution. such as collateral optimisation and The trends discussed above have transformation, and firm balance driven increased electronification of sheet management in addition to repo markets. There has been some its traditional filling shorts and fall-back in this trend, due to the financing role. bond market squeeze experienced towards the end of 2016 in Europe. This Increasing the efficiency highlighted the importance of maintaining MTS and Nex’s BrokerTec, resulting in and effectiveness of the repo a relationship focussed approach to sourcing added complexity for the repo trader. The trader liquidity when times of market stress occur. increased scope of the various electronic This combination of fewer resources, Despite this, there remains a long term trend trading platforms, and idiosyncrasies increased scope, growing complexity, and

32 Securities Finance Monitor Issue 09 finadium.com/securities-finance-monitor/

fragmentation of the market landscape objectives and binding constraints, but a Jerome has resulted in a need to assess how repo future AI driven system could then suggest Cardon i s traders can become more effective and integrated transaction combinations to Repo Product efficient in response. We identify three key meet those goals that are more complex Manager at areas for improvement; data aggregation/ than a basic single trade approach. Broadridge. normalisation, automation, and analytics. Firms could also deploy predictive Jerome has analytics to determine when prices diverge over 20 years Data aggregation and from general collateral (GC) rates or when of experience normalisation liquidity will be traded, and where. From gained in There is a growing need to normalise a pricing perspective, the optimal time to both the data from different trading venues in a trade can be informed by the ability to use Consultancy single screen. This ensures traders do not big data to identify correlations between a and Investment Banking industries, waste valuable time and mental capacity wider range of market and other news data including senior level roles at Lloyds, RBS, trying to aggregate liquidity manually across and their impact on peaks in liquidity, or Capco, ING and Deutsche Bank. Jerome multiple markets in different formats. A when spreads are compressed. has a specific focus on risk management, single market view provides benefits in The trader can then add an element regulatory compliance and change this respect. of human strategic thought around how management and in a previous role When this view is combined with an their trading activities impact the various undertook the design and delivery of CVA- integrated view of global inventory, assisting parameters the firm is trying to optimise FVA, RWA, and Collateral Optimisation with general collateral (GC) allocations for, before they then execute these trading desks for a European financial institution. and clearly showing over term and over activities with a minimum number of basket definitions, the trader can then manual touchpoints. This sanity checks bring inventory to market more easily or the actions suggested by the AI algorithm Martin address the firm’s financing needs or short and offers the ability to overlay an aspect of Seagroatt is positions more rapidly. human creativity across a machine driven the Global approach to trading. Marketing Automation Director for Automating many of the time consuming Conclusion Broadridge’s and mundane manual tasks traders need While the day to day life of the repo securities to carry out on a day to day basis can trader is becoming more complex, a number financing also offer significant scope for efficiency of tools are available to help traders deal and collateral improvements and frees up time for decision with this added complexity, while also management making. For example, manually populating opening up the ability to automate manual business unit. 50 lines of securities with 50 separate quotes tasks and enhance trading opportunities. Previously he was Marketing Director at is not the best use of a trader’s time. Using Firms that utilise the latest technology, 4sight Financial Software. In June 2016 process automation solutions for bulk such as Broadridge’s front office Repo 4sight was acquired by Broadridge and quoting and market sweeps can reduce Order Quote (ROQ) solution to aggregate the 4sight Securities Finance and Collateral some of these bottlenecks and automate the electronic markets, integrate global Management System rebranded as the trader’s day to day activities to the greatest inventory, and automate execution will Broadridge Securities Financing and degree possible. unlock business efficiencies and increase Collateral Management Solution. In his revenue opportunities. As repo becomes 12 years in the industry he has specialised Analytics more central to core competencies such in securities lending, repo, and OTC/ The data aggregation/normalisation as collateral optimisation, liquidity, and listed derivatives collateral management and automation described above begin to balance sheet management for financial solutions. Prior to that Martin worked as a open possibilities around pre-trade data firms, the importance of effective repo business expert in technology systems for analytics and decision support tools. With trading has never been greater. risk management in the energy industry. the advent of artificial intelligence (AI), machine learning, and predictive analytics, we should see the emergence of mainstream solutions that can analyse real-time market trends and firm inventory. Traders and desk heads will still establish

Issue 09 Securities Finance Monitor 33 Global Securities Finance and Collateral Management Solutions

Optimize funding and collateral decisions

Reduce counterparty and operational risks

(QDEOHHņFLHQWDQGKLJKJURZWKRSHUDWLRQV

Meet regulatory and market requirements

Technology Communications Data and Analytics

Broadridge.com/cm