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Thomson Reuters
Wealth Management & Private Banking

The buy-side answer to shrinking balance sheets

Bryan VanderPutten

19 Oct 2017

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As financial institutions shrink their balance sheets, what are the options for buy-side firms impacted by the resulting lack of liquidity in repo trading?

Since the financial crisis, systemically important banking organizations and other institutions have been under sustained pressure to deleverage assets from their balance sheets.

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The stringent bank capital rules, along with other post-crisis reforms, have particularly impacted liquidity provisions from these traditional bank sources.

Nowhere is this more felt than in the mechanism by which collateral is moved around the system. Repo trading allows institutions to use Treasuries and other securities as collateral to raise cash from investors.

But for buy-side players, including asset managers and pension funds, the lack of liquidity, particularly during the banks’ capital reporting periods, has raised the cost of these repo transactions.

Watch video — Risks and Opportunities in the Repo Market — Power of the Platform

Direct trading option

If the intermediary banks and dealers can’t take their business, then who will?

Clients can choose to fund their positions at higher uncollateralized bank loan rates or they can consider trading direct with other buy-side firms. The latter option — dubbed an “All-to-All” or “Peer-to-Peer” or “Direct Trading” market — is becoming increasingly popular with buy-side firms of all sizes.

However, such an approach also comes with elements of risk that require careful, day-to-day management.

As a result, a new supportive ecosystem is emerging.

Alternative trading systems

There are companies that can help with Know Your Customer due diligence and legal agreements, as well as make introductions between collateral providers and cash providers for a fee.

We are also now seeing alternative trading system (ATS) firms building applications that do all the above plus provide electronic trade negotiation and execution.

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These ATS firms allow the buy-side to trade directly on screen with each other, while still allowing the sell-side to provide liquidity where necessary.

These firms are also building connectivity and allowing executed trades to pass electronically to third party applications that provide matching, settlement, and trade management services.

Buy-side firms can connect their own trading applications directly to these electronic marketplaces as well.

These new approaches provide the possibility of cheaper funding and better returns on collateralized loans, but also come with added risks.

Sophisticated tools

Trading direct means more customers, more counterparty risk, and more transactions, which introduces settlement and operational risk.

However, there are sophisticated tools available that can help participants manage these risks, such as those offered by the partnership between Helix Financial Systems (Helix FS) and Thomson Reuters.

Helix FS has been building custom software solutions for the Securities Finance (Sec Finance) industry for over 20 years.

Our products allow clients to manage their global collateral inventory for fixed income and equities through an integration with Thomson Reuters’ back office transaction processing solution, BETA.

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Plug-and-play solution

The trader tools in Helix FS’s applications allow users to capture and manage many types of Sec Finance transactions such as repos, stock loan, triparty, bonds borrow, pledges, cash, and more.

Helix FS’s real-time solution calculates trader P&L, organizes securities on the balance sheet and analyzes interest rate and counterparty risk.

Our user-friendly interface provides easy control over all Sec Finance events such as collateral substitutions, upgrades, returns, re-rates, mark-to-market pricing, and margin calls, throughout the entire life cycle of the transaction.

It also has connectivity with securities pricing vendors, brokers, and clearing systems in order to automate the front-to-back transaction flow.

Packaging Thomson Reuters BETA back-office application as a hosted “plug-and-play” solution has also made HelixREPO a viable, easy to implement, and affordable solution for Thomson Reuters clients without compromising any of Helix’s feature rich qualities.

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