Improving the resilience and stability of the market
11 June 2024
Matthew Chessum, director of securities finance at S&P Global Market Intelligence, explores how the availability of data, which was once fairly limited, has evolved to become an essential aspect of financial markets, and in turn allowed the repo market to become a globalised and heavily interconnected utility
Image: stock.adobe/chaliya
Data-driven innovation has been present across all areas of financial services since the 1900s. In the early days of finance, data was collected on a manual basis and market participants relied on paper records and rudimentary tools to track prices, volumes and transactions. The availability of data was therefore often limited.
The advent of telegraphy in the late nineteenth and early twentieth century, followed by the use and introduction of the telephone and the ticker tape, enabled a revolution in terms of the availability and dissemination of data across financial markets. The widespread adoption of the computer in the late twentieth century transformed data processing and analysis within financial markets as the volume of data exploded — owing to electronic trading platforms and market data feeds. Computerisation gave rise to the ability to use data in trading algorithms, enabling faster execution and automation. This is when the value of data became truly understood as its use was essential for creating the tools needed to generate a competitive edge.
The use and success of algorithmic trading ushered in a new era of data-driven analysis and modelling in financial markets, as quantitative finance became increasingly popular in the late twentieth century. Data became even more essential as statistical analysis, time series modelling, and risk management techniques, became increasingly prevalent across trading desks.
Currently, financial data is creating an era of big data and artificial intelligence. The proliferation of digital technologies, and the exponential growth in data volumes, have led market participants to have access to vast amounts of both structured and unstructured data that can be leveraged to gain insights, develop predictive models, and enhance both decision making and risk management processes.
Since the repo market’s origins in the 1920s, when the Federal Reserve in the US used repurchase agreements to conduct monetary policy operations, the role of data within the repo market has continued to evolve in a similar way. The availability and transmission of data has played a critical role in the natural evolution of the market, allowing it to become a globalised and heavily interconnected utility, as well as becoming a key short-term mechanism for borrowing and lending.
This evolution, in both the size and importance of the market, has increased the requirement for all financial participants to have a firm understanding of how the repo market functions. Given the importance of the repo market in determining liquidity provision, interest rate transmission, collateral management, and broader financial market stability, having access to accurate, timely and comprehensive data, remains critical to a wide range of financial market participants.
The decentralised nature of the repo market, which operates across multiple jurisdictions, currencies, and types of securities, has often led to numerous challenges in aggregating and standardising repo data across the different market segments. This has made obtaining a comprehensive view of market activity challenging. As an over-the-counter market, confidentiality concerns have also made market participants apprehensive about disclosing trading information — limiting the amount of quality data available. The level of diversity seen across market participants, the level of regulatory variation, and the complexity of transactions, also create potential barriers to transparency across this segment of the financial landscape.
Having access to repo market data is incredibly useful for several reasons. First and foremost is risk management. As with other financial products, data allows market participants to assess and manage the risks associated with repo transactions. This includes counterparty credit risk, liquidity risk, market risk and operational risk. Having the ability to use data to simulate changes to trading structures and trading strategies is an essential role for any fund manager or trader to undertake.
Data also allows for price discovery and market efficiency. Being able to use data to accurately assess prevailing market conditions in order to obtain competitive and accurate pricing, leads to better execution, facilitating access to funding at fairer rates. In turn this promotes more efficient markets, which supports a more effective allocation of capital and the optimisation of trading resources.
Data-driven decision making helps to evaluate risk-return profiles of repo transactions and helps to optimise funding and investment strategies, along with effective balance sheet management. Repurchase transaction data assists market participants in identifying market trends, recognising patterns and evaluating the impact of both regulatory changes and market events on specific trading positions or across a trading book. Data-driven insights contribute to a deeper understanding of the repo market, leading to more informed decision making.
The necessary data
As the provider of one of the largest securities lending and repo datasets available, S&P Global Market Intelligence, through its Repo Data Analytics (RDA) product, provides the data necessary to execute on data-led decisions. The data available allows market participants to identify broader trends that may not otherwise be apparent when looking at individual data points; analyse liquidity across a choice of markets, tenors of trades and haircuts; and provides a window into both liquidity and market rates.
The product currently covers over twenty thousand instruments, incorporating activity from more than two trillion dollars of global transactions. And it continues to grow. The data can be viewed through our bespoke web portal or can be delivered directly via API or daily data feed. Key features include the ability to screen portfolios by maturity, haircut, currency, asset class and region. It offers a visualisation of market activity through interactive dashboards, as well as the ability to review a trading book using a proprietary tool that offers the ability to compare trading books versus the rest of the market using rates, haircuts and maturities.
Overnight repo curves and a look through the securities lending market are also available. These functions permit participants to assess the benefits of the chosen route to market based on rate and liquidity, in addition to the benefit of seeing aggregated rates across specific yield curves.
Previously, repo market data has only been available through a relationship with trading partners or via an electronic trading platform. RDA offers an independent source of daily market repo data, marking a turning point in the evolution of data provision across the broader market. As seen in the securities lending market, independent aggregated market data increases the statistical significance of analysis by drawing data from a range of various sources. As a result, more robust conclusions about repo market trends can often be obtained with greater confidence. This all helps in providing more vigorous forecasting and planning, risk management and decisions making.
As has also been seen in the securities lending market, data aggregation on a major scale is only the first step in a natural progression to real-time (or intraday) monitoring, surveillance, and pricing. It is also the first step in the journey towards more advanced data analytics using machine learning, artificial intelligence, and big data analytics, to extract further insights from the repo market. These techniques often allow the identification of patterns, trends and anomalies in market activity that may otherwise be missed. Data trends on this scale are increasingly important in informing trading strategies and enhancing risk management practices even further.
Given the numerous benefits that the availability of data brings, the arrival of more independent data sources to the repo market is something to be celebrated. Data remains the fuel for innovation and research. It can be used to develop new trading strategies, risk models and technology solutions that benefit market participants, investors, and the market as a whole. It is a key component in improving the resilience and stability of the market.
A well-informed repo market will be much better equipped to withstand shocks, mitigate systemic risks, and maintain financial stability. As has been seen throughout the existence of the financial markets, data-led innovation has transformed the finance industry by improving decision making, reducing risks, enhancing efficiency, and most important of all, delivering better results for customers.
The advent of telegraphy in the late nineteenth and early twentieth century, followed by the use and introduction of the telephone and the ticker tape, enabled a revolution in terms of the availability and dissemination of data across financial markets. The widespread adoption of the computer in the late twentieth century transformed data processing and analysis within financial markets as the volume of data exploded — owing to electronic trading platforms and market data feeds. Computerisation gave rise to the ability to use data in trading algorithms, enabling faster execution and automation. This is when the value of data became truly understood as its use was essential for creating the tools needed to generate a competitive edge.
The use and success of algorithmic trading ushered in a new era of data-driven analysis and modelling in financial markets, as quantitative finance became increasingly popular in the late twentieth century. Data became even more essential as statistical analysis, time series modelling, and risk management techniques, became increasingly prevalent across trading desks.
Currently, financial data is creating an era of big data and artificial intelligence. The proliferation of digital technologies, and the exponential growth in data volumes, have led market participants to have access to vast amounts of both structured and unstructured data that can be leveraged to gain insights, develop predictive models, and enhance both decision making and risk management processes.
Since the repo market’s origins in the 1920s, when the Federal Reserve in the US used repurchase agreements to conduct monetary policy operations, the role of data within the repo market has continued to evolve in a similar way. The availability and transmission of data has played a critical role in the natural evolution of the market, allowing it to become a globalised and heavily interconnected utility, as well as becoming a key short-term mechanism for borrowing and lending.
This evolution, in both the size and importance of the market, has increased the requirement for all financial participants to have a firm understanding of how the repo market functions. Given the importance of the repo market in determining liquidity provision, interest rate transmission, collateral management, and broader financial market stability, having access to accurate, timely and comprehensive data, remains critical to a wide range of financial market participants.
The decentralised nature of the repo market, which operates across multiple jurisdictions, currencies, and types of securities, has often led to numerous challenges in aggregating and standardising repo data across the different market segments. This has made obtaining a comprehensive view of market activity challenging. As an over-the-counter market, confidentiality concerns have also made market participants apprehensive about disclosing trading information — limiting the amount of quality data available. The level of diversity seen across market participants, the level of regulatory variation, and the complexity of transactions, also create potential barriers to transparency across this segment of the financial landscape.
Having access to repo market data is incredibly useful for several reasons. First and foremost is risk management. As with other financial products, data allows market participants to assess and manage the risks associated with repo transactions. This includes counterparty credit risk, liquidity risk, market risk and operational risk. Having the ability to use data to simulate changes to trading structures and trading strategies is an essential role for any fund manager or trader to undertake.
Data also allows for price discovery and market efficiency. Being able to use data to accurately assess prevailing market conditions in order to obtain competitive and accurate pricing, leads to better execution, facilitating access to funding at fairer rates. In turn this promotes more efficient markets, which supports a more effective allocation of capital and the optimisation of trading resources.
Data-driven decision making helps to evaluate risk-return profiles of repo transactions and helps to optimise funding and investment strategies, along with effective balance sheet management. Repurchase transaction data assists market participants in identifying market trends, recognising patterns and evaluating the impact of both regulatory changes and market events on specific trading positions or across a trading book. Data-driven insights contribute to a deeper understanding of the repo market, leading to more informed decision making.
The necessary data
As the provider of one of the largest securities lending and repo datasets available, S&P Global Market Intelligence, through its Repo Data Analytics (RDA) product, provides the data necessary to execute on data-led decisions. The data available allows market participants to identify broader trends that may not otherwise be apparent when looking at individual data points; analyse liquidity across a choice of markets, tenors of trades and haircuts; and provides a window into both liquidity and market rates.
The product currently covers over twenty thousand instruments, incorporating activity from more than two trillion dollars of global transactions. And it continues to grow. The data can be viewed through our bespoke web portal or can be delivered directly via API or daily data feed. Key features include the ability to screen portfolios by maturity, haircut, currency, asset class and region. It offers a visualisation of market activity through interactive dashboards, as well as the ability to review a trading book using a proprietary tool that offers the ability to compare trading books versus the rest of the market using rates, haircuts and maturities.
Overnight repo curves and a look through the securities lending market are also available. These functions permit participants to assess the benefits of the chosen route to market based on rate and liquidity, in addition to the benefit of seeing aggregated rates across specific yield curves.
Previously, repo market data has only been available through a relationship with trading partners or via an electronic trading platform. RDA offers an independent source of daily market repo data, marking a turning point in the evolution of data provision across the broader market. As seen in the securities lending market, independent aggregated market data increases the statistical significance of analysis by drawing data from a range of various sources. As a result, more robust conclusions about repo market trends can often be obtained with greater confidence. This all helps in providing more vigorous forecasting and planning, risk management and decisions making.
As has also been seen in the securities lending market, data aggregation on a major scale is only the first step in a natural progression to real-time (or intraday) monitoring, surveillance, and pricing. It is also the first step in the journey towards more advanced data analytics using machine learning, artificial intelligence, and big data analytics, to extract further insights from the repo market. These techniques often allow the identification of patterns, trends and anomalies in market activity that may otherwise be missed. Data trends on this scale are increasingly important in informing trading strategies and enhancing risk management practices even further.
Given the numerous benefits that the availability of data brings, the arrival of more independent data sources to the repo market is something to be celebrated. Data remains the fuel for innovation and research. It can be used to develop new trading strategies, risk models and technology solutions that benefit market participants, investors, and the market as a whole. It is a key component in improving the resilience and stability of the market.
A well-informed repo market will be much better equipped to withstand shocks, mitigate systemic risks, and maintain financial stability. As has been seen throughout the existence of the financial markets, data-led innovation has transformed the finance industry by improving decision making, reducing risks, enhancing efficiency, and most important of all, delivering better results for customers.
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