Repo is increasingly no longer just a bank topic anymore, said experts speaking at a closed Deutsche Boerse roundtable on Tuesday.
Robbert Booij
The asset class is increasingly becoming a buy-side topic said experts as end clients are voluntarily joining the cleared repo environment, viewing it as a neat instrument to facilitate trading.
Erik Müller, chief executive of Eurex Clearing described repo as “the oil in the wheels of financial markets,” and a key priority for the business going forward.
In 2017, the area was “barely double digit” and now boasts triple digit revenue – with this significant growth put down to clients looking to finance their undertakings and mobilise collateral to get cash.
Speaking to the reasons in more depth, Müller explained it was down to “the successful risk management mechanisms of CCPs, including initial margin and variation margin.”
Specifically, variation margin refers to the margin to margin each day, while initial margin makes up the part of margin that covers future market moves.
“Those two together means that end clients really need a mechanism on how to transform the securities that they own into cash if needed, as variation margin is cash only at the CCP,” added Müller.
“That’s why if you look at our repo franchise, some of our biggest clients nowadays are different from 24 months ago – for example, Dutch pension funds have become some of our largest repo clients.”
Read more: Carrot or stick? How the EU plans to reduce reliance on UK CCPs for derivatives clearing
Repo made up one of three key pillars highlighted by Müller, along with exchange traded derivatives (ETD) and interest rate swaps (IRS). In addition, retail trading was also cited as a key area of focus as market structure changes and increasing focus across the region continues to grow.
Robbert Booij, chief executive of Eurex Frankfurt, highlighted the significant opportunity Europe has to embrace retail across Europe, describing the area as “a missing customer group for European markets as a whole”.
He explained: “It’s difficult also to make markets more attractive for retail investors, but we do believe we have a very good opportunity as we have the equity and fixed income products and mini futures, and we are also open for 23 hours a day – so all the infrastructure and the capabilities are there.”
The retail market in Europe is of course considerably smaller than in jurisdictions such as China and the US, the first and second biggest retail markets respectively, with fragmentation both jurisdictionally and culturally a key factor across the EU.
Read more: The relentless rise of retail trading
Booij asserted that though numerous cultural and regulatory factors are significant and perhaps unable to be combated, there are practical steps that can be taken across the region to open it up to the retail market.
Specifically, making sure that retail investors are well educated on the risks involved with investing in derivatives, and making clear exactly how derivatives can fulfil a very good, cost-efficient way of getting exposure.
Further, the harmonisation on the payment for order flow ban in Europe is also set to potentially create additional interest in derivatives investing.
“It’s education, it’s product offering, and marketing potentially as well [that will boost retail trading]. We see that many other exchanges in Europe are doing the same but it’s important to emphasise that we also will remain very careful as well to make sure that we do not create a situation where retail investors make uninformed decisions.”