Historically market structure in foreign exchange (FX) has lent itself to ISDA-based, direct bilateral trading, meaning buy-side firms – in particular real money firms who don’t have the capabilities to use a prime broker model – are often locked into these relationships with banks based on credit lines.

However, buy-side institutions have become increasingly keen to diversify their access to liquidity outside of these relationships. And this has only been exacerbated by the introduction of new liquidity providers into the market, a reduction in warehousing by banks in recent years and market volatility on the back of macro events – such as the Yin carry trade unwinding in recent weeks.

“What if a bank channel is blocked?” said Tjerk Methorst, senior trader manager at PGGM. “We then need a new route. My role is to ensure tooling is sufficient to access liquidity via different routes.”

Given the challenging environment participants find themselves within, traders have become increasingly keen to explore how new liquidity providers and sources could help the industry to better prepare for similar events in the future.

However, in order to do so the untangling of liquidity and credit must take place, panellists said, speaking in discussions exploring various solutions including peer-to-peer liquidity and the prime brokerage model used by by hedge funds.

“Historically speaking, market structure has required two things to happen in bank relationships and those are pricing and credit. Without both you’d have no relationship and no liquidity,” said Jay Moore, co-founder and chief executive officer of FX HedgePool, a peer-to-peer liquidity platform.

“Hedge funds can access deeper and more specialist pockets of liquidity through prime brokers, but the real money space is not in the prime broker world because of the complexity of their fund ranges. A prime broker at the centre of their credit universe doesn’t make sense.”

He also noted that given real money asset managers are reliant on the ISDA relationships that they have this can sometimes be limiting to what they can access.

“You might have a fund manager with 15 banks on the panel but perhaps not SEB and they want to access specialised Scandinavian liquidity but they can’t today,” added Moore. “Asset managers should be able to access the best liquidity in the world. Separating credit from liquidity will open up specialist LPs [liquidity providers] to help where needed most.

“Big banks want to do more trading but they’re capped out at capacity. This is where other specialised providers come in with other pockets of liquidity. The credit story is changing.”

New protocols and greater transparency were called for by panellists in order to overcome this reliance on traditional providers and “bridge” the gap amid the decoupling of credit and liquidity.

“It’s about new protocols. All to all will increase transparency. Decoupling [liquidity and credit] will mean a better price for both parties,” said Alvin Chopra, chief operating officer and co-founder at SpectrAxe, an all-to-all FX options trading platform.

“Banks are crucial. They’ll make money elsewhere. It’ll be a migration from risk transfer services to algo trading. The client to dealer relationship will be better.”

Methorst concurred: “This will spur innovation in other ways to solve credit through platforms.”

New liquidity providers

Given the shifting dynamics, panellists speaking this week explored the potential for new liquidity providers. The overall conclusion was that while new liquidity sources are of course desired, ensuring that relationships are meaningful enough to prove fruitful is essential. Finding the “right mix of liquidity providers” is paramount, but the question is, what is that?

“More liquidity providers is not the way to go,” said Jonas Virtanen, global head of spot trading at SEB. “You need fewer but stronger relationships and you need to make sure it works for both parties at all times. The client also needs to behave as the taker and look after liquidity.”

Panellists were united in their stance that communication is central to maintaining the strong relationships required in today’s environment. Like Virtanen, Anthony Brocksom global head of sales at FX Spotstream reiterates that this is the responsibility of both the liquidity provider and the client.

“You want a liquidity provider to take the call. You need open dialogue. Clients have to behave too,” he explained. “They have to be honest with how they’re going to be trading. For example, if you tell them off the bat you’re going to sweep the book then they know to expect it.”

When asked how a participant might go about identifying a new liquidity provider to use, speakers agreed that having a natural franchise connected to it would make it favourable.

“Is there a franchise behind it that makes sense? Non-bank LPs don’t have the same shape for them you have to ask what’s the model? What drives the additional benefit?” said Sam Johnson, managing director at iSAM Securities – a new liquidity provider.

“If the story makes sense, it’s compelling. Clients need more novel analytics tools that simulate the market. We need that dialogue.”

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BTIG snapped up two former Panmore Gordon managing directors to join its newly launched hedge fund group based in London. Bella Brandon joined BTIG from Panmure Gordon where she was responsible for building out its pan-European and US trading, sales trading and content effort. Prior to joining the investment bank, she spent nine years at equities agency broker Olivetree in its special situations division.

Elsewhere, Zoe Henderson joined BTIG from Panmure Gordon, where she had been serving as a managing director and co-head of the dynamics team. Prior to joining Panmure Gordon, Henderson served at Olivetree as managing director and co-head of European sales trading.

Tony Freeman, director of policy at non-profit industry body and catalyst for collaborative innovation within the capital markets, ISITC Europe CIC, joined the recently launched UK Treasury Taskforce for accelerated settlements. Launched on 9 December 2022, the Accelerated Settlement Taskforce will look to explore the potential for the faster settlement of financial trades in the UK. Alongside Freeman’s appointment, Bill Meenaghan, chief executive of DLT database SSimple, also joined the taskforce.

The post People Moves Monday: In case you missed it appeared first on The TRADE.

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The European Markets Infrastructure Regulation (EMIR) requires over-the-counter derivatives to be cleared through central clearing counterparties, therefore increasing the need for collateral, and subsequently, use of the repo markets.

At the same time, capital rules have forced banks to step away from the repo markets, further impacting liquidity.

A report from the Global Financial Markets Association (GFMA) and the International Capital Market Association (ICMA) at the end of 2018 highlighted these issues and called on the Financial Stability Board (FSB) and Basel Committee on Banking Standards to review the coherence and calibration of the post-crisis regulatory framework.

Pension funds have been exempted as the requirement of CCPs to post variation margin in cash might pose liquidity challenges. However, they have still been vocal about how incoming regulations will impact the market.

In 2016, PGGM wrote in a blog that, “a sub-optimal or non-functioning repo market poses a threat to financial stability and further increases the need for the ability to post non-cash collateral.”

The agreement with Eurex will allow PGGM’s clients to trade with more than 140 Eurex participants including commercial banks, central banks, government financing agencies or supranationals.

“PGGM continues to voice concerns about the adverse effect that cash variation margin requirement has on pension funds,” said Paul van de Moosdijk, Investment Manager at PGGM. “Through Eurex Repo’s offering PGGM is enhancing its access to cash liquidity and market infrastructure to further address these concerns.”

Eurex’s scheme will allow PGGM to invest cash securely or raise short-term funding reliably utilising more than 13,000 ISINs. In this way, Eurex said PGGM expands its spectrum of available liquidity providers significantly, minimises counterparty risk, and reduces costs. 

Eurex has integrated its GC Pooling repo market with straight-through processing across trading, central clearing and Tri-party settlement, the latter through Clearstream.

“The successful onboarding of PGGM validates our efforts to open up the centrally cleared repo market to the buy side,” Matthias Graulich, global head of fixed income, funding and financing strategy and development at Deutsche Börse Group. “We anticipate that other pension funds and buy-side entities with large directional derivatives portfolios will appreciate the significant benefits of combining centrally cleared repos with OTC IRS under ISA Direct in the near future.”

In summer last year, the pension fund also became a direct participant of Eurex Clearing’s Securities Lending central counterparty (CCP) for cost and operational efficiencies.

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