Regulatory capital pressures on banks have increased friction in securities borrowing and lending, and reduced liquidity in the repo market.
But new processes and platforms are launching to fill the void and shaking up the once-staid business of collateral management.
One such platform is Wematch.
The brainchild of BNP Paribas Securities Services executive David Raccat, Wematch is a matching platform for total return swaps, repos and securities borrowing and lending. Wematch was launched in February 2017 offering a venue to match initially total return swaps (TRS) and expanded into repos and stock loans in September 2017.
“The feedback has been very positive from the market,” said Raccat. “We have onboarded 24 clients and liquidity is coming in to the platform. Since we went live we have received $2 tn of interest and settled more than £12 bn of TRS, stock loans and repos.”
Raccat said the platform has an average of more than 25 users connected each day from 17 desks and receives around 2000 interests from Europe and Asia, where it opened an office in November.
Raccat, who has over 20 years’ experience in the repo, custody and securities lending industry, launched the platform to address what he saw as years of under-investment in front office technology in the industry.
“In the financing and stock loans industry, a lot has been done in the middle and back office in recent years but investment in the front office has lagged,” he said. “Processes built around APIs and automation that are prevalent in other industries have not been widely adopted on the front-office / execution of collateral and repo markets.”
The drive for transparency
Another tail-wind for Wematch is regulation and the drive to greater transparency across capital markets.
“Regulation is pushing strongly for more transparency. The markets we operate in have historically been considered opaque and we are here to shine a light on them,” said Raccat.
“There is no reason that these markets will not become fully automated and transparent and we are here to drive that forward and evolve with the market.”
While Mifid II does not explicitly cover securities financing and repo when it comes to pre-trade and post-trade reporting, Raccat believes that the direction of travel is clear: clients want transparency and the ability to prove best execution across their operations.
And with the Securities Financing Transaction Regulation beginning to come into force in 2019, securities borrowing and lending and repo will be caught up formally in the global trend towards transparency and automation.
“The platform will be fully Mifid II compliant from the outset,” said Raccat. “While sec lending and repo do not have a strong best execution requirement under Mifid II we have everything on the platform to enable clients to monitor execution quality.”
Wematch works in partnership with Kyte Broking Limited (FCA regulated). Kyte Broking Limited operates the trading platform, which will become an organised trading facility (OTF) under Mifid II.
The platform has almost finalised its connectivity to Pirum for trade upload and post-trade services and Raccat is beginning conversations with operators of central counterparties (CCPs) to establish connectivity and give clients the option of clearing trades.
Raccat is self-admittedly “obsessed” with making the market as connected as possible. Wematch is built around a set of APIs which enables both inbound and outbound connectivity with clients, allowing suggestions of trades to clients as well as users posting bids and offers to the platform.
Raccat identifies an edge for Wematch in using artificial intelligence to understand users’ preferences and requirements, suggesting matches and trade opportunities to them based on what they have traded in the past.
“We see this service as being like an Amazon for securities financing” he said. “We base recommendations on what people have expressed interest in or traded in the past.
“If you put a selling interest on a CAC40 TRS regularly, we will let you know when someone is putting up a buying interest on the same structure even if you have not put your interest. We communicate with the users regularly and they like the approach.”
Supporting not disintermediating
While other platforms want to overhaul market structure and provide an all-to-all service, Raccat is clear he is not trying to disintermediate banks.
“We deal with the banks, we don’t talk to our clients’ clients. There is no risk of disintermediation on Wematch. We are simply automating processes that have been traditionally manual such as collateral transformation and collateral upgrades.
“Processes that traditionally took hours to negotiate and set up can be done in less than half an hour on Wematch if users have the right systems and the right set up. We are trying to institutionalise efficiency.”
Raccat recognises the trend towards disintermediation in the market but is sceptical about how rapidly it will progress.
“I don’t see how a beneficial owner will be able to deal efficiently on a securities lending trade directly with a hedge fund. The credit parameters, requirements around managing collateral, pre-trade and post-trade etc will still necessitate the intervention of a lending agent or a prime broker,” he said.
“Disintermediation may come at some point but not yet, we are clear about that in our commercial strategy. We are clear and transparent about what we are doing. Some platforms have other strategies but at this stage we are focused on providing a service to financial institutions.”
Another selling point for Wematch, according to Raccat, is its independence. Other platforms that have launched tend to be owned by large banks or interdealer brokers. Wematch is funded by private shareholders.
“We are not biased by having one large banks as a shareholder. It is only private investment we have,” he said. “We are offering best execution, transparency and liquidity and to do that effectively we think we need to be unbiased and totally neutral.”
One major challenge for Wematch and all new collateral platforms is building liquidity. Many clients adopt a “wait-and-see” approach but that perpetuates a lack of liquidity.
“It is all about change management,” believes Raccat. “Today we have the clients, we have the desks, we have the technology, we have the traders and we have the potential. It is growing every day with new users regularly joining the community. The traction is here but needs a permanent push.
“We are getting there, everyone is getting connected and liquidity is growing.”