Market participants must recalibrate their business and operational models in order to benefit from changes within funding markets, a study has said.
According to a whitepaper conducted by BNY Mellon and PwC, while regulation and on-going reform shapes funding, strong market forces and profitability structure will impact repo volumes, participant interactions and views of risk in the system.
The study is the result of a four-year initiative by the tri-party repo infrastructure reform task force including BNY Mellon and the Federal Reserve Bank of New York.
According to the research, the future of the US market will be shaped by pending regulations for repo users that will dampen repo volumes, an increased demand for liquid assets as well as an imperative need to expand cleared repo services in the US.
An initial increase in demand for liquidity will also be followed by a further increase from money market reform indicating that the Fed will likely maintain its reserve repurchase facility (RRP) for the foreseeable future.
To date, the Fed has provided liquid assets to support cash investing through its RRP.
According to the paper, 75% of surveyed participants feel that wholesale funding markets are less vulnerable to a crisis as a result of the initiative.
Despite a more intense regulatory environment, PwC stated that a focus on collateral management and cleared repo will be at the forefront of change. Such change, it states, will help clients relieve pressure from risk, regulation and other operational obstacles.
“As a result of this research, repo participants will better appreciate the value of collateral connectivity and benefits that an integrated view of their accounts would provide to their organisations, particularly when combined with the ability to post collateral across current boundaries CSDs and countries”, said Christopher Pullano, Partner at PwC.
“The research clearly supports the conclusion that collateral connectivity is one of the most notable and identifiable long term trends in the repo market that firms should begin to understand and plan for now.”
These developments are understood to have a large impact across the industry however individual benefits may vary across collateral products, cash investors, interdealer brokers and regulators.
“This complex array of priorities increases the importance of a comprehensive collateral roadmap to guide firm strategy through interactions with market participants,” added Brian Ruane, CEO of Broker-Dealer Services and Tri-Party Services at BNY Mellon.
“The change we see coming to the wholesale funding markets and broader financial industry is profound.”
Recalibration key for funding benefits study says
Market participants must recalibrate their business and operational models in order to benefit from changes within funding markets, a study has said.