Swiss broker to set up London repo venue

Tradition, the Swiss interdealer broker, is looking to reinvigorate Europe’s struggling “repo” market with a new electronic trading venue where pension funds and corporations can pawn high-quality assets for cash.

The venue, called DBV-X, is aiming to supplement the role played by banks, which have historically used the repo, or repurchase, market for cheap financing by temporarily lending their assets to investors in exchange for short-term loans.

New global trading rules have made it harder for investors to find “margin”, which protects against defaults, to back their over-the-counter derivatives trades. The supply of high-quality assets in Europe has also been depleted by the European Central Bank’s quantitative easing programme, which has taken assets out of the industry’s available pool for lending at a rate of around €60bn a month.

The anonymised London-based venue is likely to go live in the fourth quarter, Tradition said. The intention is to match treasurers and asset managers sitting on billions of high-quality assets with investors like hedge funds and pension funds in need of short-term funds to back their derivatives trades. Tradition is aiming to encourage trading in standardised collateral baskets or other secured deposits, in exchange for cash or other collateral.

Tradition’s DBV-X will focus on liquid “general collateral” baskets, consisting of assets such as government and high-grade corporate bonds. The assets can be traded in several currencies over standard maturity dates, akin to the futures market. The trades will be conducted as repo trades, with the assets returned via a repurchase agreement.

It will be regulated in the UK as a multilateral trading facility and be headed by John Wilson, a managing director at Tradition and formerly head of over-the-counter (OTC) derivatives clearing at RBS and Newedge.

“The current regulatory and economic environment is driving fundamental change in funding and collateral markets,” said Mr Wilson. “This is driving the need for all firms to reassess their treasury strategies and consider diversifying their counterparties.”

Global regulators want swaps, often used by asset managers and companies for hedging, to be backed by margin or “insurance” for trading. The stringent rules are expected to lead to a sharp rise in the number of daily margin calls — and high quality collateral for them — executives say.

Other rules will limit the number of times that collateral can be recycled for other trades. The combination is expected to result in rising demand for immediate access to collateral, regulators and executives admit.

Tradition is exploring new markets outside the historic scope of interdealer brokers as the firm and its rivals adapt to deep structural change. Regulators want more transparency and electronic trading, and are forcing banks — the main users of OTC markets — to deleverage their balance sheets. The broker acts as a middleman in the over-the-counter swaps and energy markets, shifting illiquid assets between buyers and sellers.

Euroclear, the Belgian-based settlement house, has been appointed as a tri-party repo agent for Tradition, providing temporary credit to help roll the loans over on a daily basis and replace them with new ones.