When it comes to intelligent design and innovation, it can seem like the equities market gets all the love. Following that, not too closely, is the fixed-income market, which has been “electronifying” for years, but which still commonly relies on phone calls, paper, and interpersonal relationships to get trades done. The repo market, however, is an area that market participants say is long overdue for tech disruption.

A repo, or repurchase agreement, is a kind of short-term borrowing for dealers of government securities to use for raising short-term capital. A dealer will sell government securities to investors, typically overnight, and then buy them back at a slightly higher price the next day. For the seller and repurchaser of the security, such a deal is a repo; for the buyer and reseller, it is a reverse repo.

If that sounds simple in theory, it’s not in practice. In the repo markets, frequent settlement fails, counterparty risk, and collateral management are persistent headaches. Settlement fails, for instance, when securities aren’t where they need to be on the settlement date, may be reduced when various markets move to T+1 settlement, but are still common today. And counterparty risk is seen as a primary exposure in repo, as collateral could be made worthless by a default.

Nicola Danese, head of European fixed income at Tradeweb, says that despite efforts to modernize workflows and trading tools, most fixed-income traders seem to choose their old-school phones and messaging apps over disruptive products to make their trades. Repo, like other areas of fixed income, is a relationship business, and Danese says that some traders still actively resist new interfaces, protocols, and platforms.

“The reason why people have always been concerned in the dealer-to-client space in electronifying repo is this is a relationship business,” he says. “The concern was if I move into electronification, I’ll lose the value of my relationship.”

Still, resistance hasn’t stopped tech vendors, venues, and even some dealers, from trying.

In the last year, projects and initiatives meant to digitize fixed-income trading by big names have stolen headlines. Octaura, the product of a Citi-led bank consortium on loan trading, launched as a company in June, with its platform due later this year. The top three fixed-income venues by trade volume—MarketAxess, Tradeweb, and Bloomberg—confirmed plans to compete for the contract to deliver the regulator-backed consolidated tape for bonds in the EU. These developments followed what Coalition Greenwich, in a report last year, called an 18-month fixed-income “e-trading tailwind,” spurred by office and trading floor closures due to Covid-19.

In an episode of the WatersWavelength podcast earlier this year, Enrico Bruni, managing director of Europe and Asia at Tradeweb, called repo the bloodstream of bond markets.

“An efficient bond market is only as efficient as an efficient repo market,” Bruni told WatersTechnology.

Bruni attributed the market’s inefficiencies, complexities, and its slow trudge toward the 21^st century to the “different flavors” of deals—bilateral versus tri-party trades, sell/buy or buy/sell repo, reverse or vanilla repos, and equity repos—seen in the space.

These nuances are what make one-size-fits-all solutions and one-stop-shops few and far between. But from APIs, to blockchain, to smart order routing, firms such as Broadridge, JP Morgan, Tradeweb, and Bloomberg are throwing the technologies that transformed equities trading at the wall and hoping something sticks.

Automation, please

Tradeweb, for one, is investing in technologies that will automate workflows in the repo markets. The venue’s most recent release is its Lifecycle Blotter, which supports lifecycle events for trading on-open, a type of trade involving repos without pre-fixed maturity dates. One example is where a deal can be terminated on any business day in the future by either party once they’ve given notice within an agreed period. The new functionality is meant to enable users to negotiate and trade actions on the platform such as partials, re-rates, re-prices, and close-outs.

“As central banks continue to dial back monetary support, we expect to see a return of more traditional liquidity sources for market participants. This should be a positive for the repo market and, ultimately, for the growth of the automated workflow that now exists to support it,” says Tradeweb’s Danese.

For its part, Bloomberg has centered on automation tools and APIs for its investments into fixed-income technology, and the data giant plans to launch an electronic trading offering, in collaboration with Euroclear and Sunthay, aimed at creating a front-to-back solution for bank-guaranteed repo. The forthcoming service will have a dealer sit between clients to act as an insurance policy against either of the counterparties defaulting.

It’s designed to enhance the bank’s capacity for credit intermediation, and it allows end users and providers to connect via a bank intermediary, says Derek Kleinbauer, Bloomberg’s global head of fixed income and equity e-trading.

Using proprietary standard master agreements from Sunthay, the offering will sit on Bloomberg’s electronic trading infrastructure, which will support integration with each market participant’s existing infrastructure. Euroclear will offer the post-trade services layer to bring tri-party services into existing custodial relationships.

“We’ve also seen an increase in the demand for automation, being able to execute either through a rules-based engine or through an API, where you can have that API plugged into your own internal systems and route via smart order router to multiple select venues,” Kleinbauer says.

When all else fails, try blockchain

Last year, Broadridge launched its distributed-ledger platform for bilateral repo trades. The platform utilizes DAML smart contracts from Digital Asset to simplify the complex multiparty workflows in the repo market. It also uses the VMWare Enterprise blockchain platform to provide the underlying cryptographically secure distributed-ledger network. Last month, Société Générale went live on the platform, joining UBS, which onboarded in August 2021.

Horacio Barakat, Broadridge’s head of digital innovation for capital markets, says the platform digitizes the repo process from front to back using smart contract technology, which allows counterparties to sync with each other, starting at execution. It creates a shared workflow for counterparties, which can then be linked to settlement through the tokenization and digital presentation of collateral.

The platform is interoperable and leverages existing market infrastructure, Barakat says. The interoperability is important, he adds, because it should increase adoption, particularly by encouraging risk-averse institutions to add something new into their workflows, rather than need to overhaul them. Down the line, there will be the possibility of interoperability between other ledgers and platforms as more come to market.

Broadridge is not alone in utilizing blockchain technology for the repo market. In 2020, JP Morgan launched the Onyx Digital Asset blockchain-based network and its intraday repo solution, which came to fruition following years of research and development at the bank around blockchain use-cases.

“We actually began our blockchain work at JP Morgan in 2015 and when we began, quite like many other financial institutions and companies at the time, we were looking at where blockchain makes the most sense to apply,” says Tyrone Lobban, head of blockchain launch and Onyx Digital Assets.

The bank was looking to identify use-cases in which the then-fledgling technology could create new products or bring efficiency to existing ones. During those years of research, Lobban says the bank executed close to 100 proofs-of-concept, some of which included matching trades between brokers and custodians and corporate actions processing.

In 2017, attention shifted to the tokenization of bonds by representing them on a blockchain. Through a partnership with the National Bank of Canada in 2018, JP Morgan issued a $150 million, one-year floating-rate Yankee certificate of deposit using blockchain technology.

The Onyx platform would be born in October 2020, building on the idea that a traditional asset could be represented on-chain.

“The idea here is that we should be able to represent any type of traditional asset on-chain and start to use a blockchain for faster settlement, more transparency around that settlement, reducing fails processes, and having stronger guarantees around the delivery of assets in exchange for payments,” Lobban says.

The intraday repo solution launched two months after Onyx, allows JP Morgan clients to borrow funds intraday from the bank on a secured basis, while putting up collateral in the form of tokenized US treasuries.

“Because it’s all happening on the same shared ledger, we can leverage things like smart contracts, and we can get much more precise about the length of time that our clients actually need to borrow these funds for,” Lobban says. Instead of entering a repo transaction that has a standard overnight maturity, a client could theoretically borrow a billion dollars for three hours and return it before lunch.

In May, the bank launched the Tokenized Collateral Network on Onyx Digital Assets. Lobban says the work around the intraday repo solution led to a broader thesis around generally improving collateral and representing different types of assets on a blockchain.

“In the collateral markets, there’s not just the challenge around the settlement timeframes alongside the need to move pieces of collateral, which you are looking to deploy in lots of different places, whether through tri-party agents or through different bilateral counterparties,” says Thomas Pikett, vice president of trading services product management at JP Morgan. “It’s also about being able to make the maximum use of your asset pool available as collateral.”

Like many firms and providers that embrace emerging technology, JP Morgan is aiming to create a service that clients can easily acclimate to. A representation of an asset should be as close to an asset as possible, with the accordant reference data, such as an Isin, Pikett says. The record of ownership should be obvious and as easy to understand as a traditional asset.

“It’s quite powerful in itself, because you can get the benefits of blockchain, you can get the benefits of tokenized assets, but you’re not needing to rebuild systems to understand a new funky asset,” he says.

As the more bespoke components of fixed-income markets have proved resistant to change, sources agree that a full overhaul of the existing workflows in the market is not welcome, nor possible. But if it’s true that an efficient bond market is only as efficient as its repo market, then change is necessary and coming. Keeping familiar processes and frameworks in place may coax even the most reluctant of traders into the digital age.