The evolution of European cleared repo

How is adoption of repo clearing in Europe progressing and are there any current challenges to adoption?

Florian Peter: European pension funds have become much more active in cleared derivatives in recent years and from an active treasury management perspective, we are seeing them demand more access to cleared repo liquidity as well. I would certainly see a continuance of this trend in the future.

There are still various hurdles that need to be overcome in terms of creating scale and efficiencies in the process of cleared repo adoption. As a clearing broker entering into the cleared repo space, I see a lot more focus on accessing liquidity efficiently in a cleared environment and this is the catalyst for the industry overall to find solutions.

It is on the broader clearing eco system, including clearing houses, clearing brokers and custodians, to find efficient solutions for clients, to make them want to move into clearing. This includes, amongst others, efficiencies in the margining of exposure across asset classes. For example, CCP cross-margining solutions will drive further adoption. This is a trend that we are observing across regions and client segments.

Of course, while there are obvious benefits to clearing, the industry must also address its potential disadvantages. Haircuts are generally cited as one of the biggest drawbacks of the space, particularly the dynamic nature of CCP haircuts in a clearing house model.

Do you see further growth in cross-margining then?

I'm a firm believer that efficient cross-margining solutions will be a major driver for attracting liquidity across products in an international market. At Deutsche Bank, our cross-product margining capabilities are a key differentiator in a competitive market. Equally, an exchange and clearing house group that is active in multiple asset classes and can reduce the overall margin requirement and then circulate assets in an efficient manner within an ecosystem, will win a lot of flow and business.

Margin efficiency is one of the key priorities for all of our clients, across the spectrum, and exchange groups have realized this. It doesn't matter what client segment we are talking to, margin efficiency is always on the list for discussion.

And what activity are you seeing in sponsored repo?

Anybody who has been in the industry for a long enough period knows that progress in clearing is steady and measured. So, while the movement towards sponsored repo models is gradual, we do definitely see traction. At Deutsche Bank, we are live on the ISA direct model. We believe that it is an efficient way for clients to get access to cleared repo liquidity, and we want to have as many conversations as possible on the topic.

Client cleared repo is still relatively new in Europe and we are helping our clients navigate the complexities across the market to access the best liquidity. Implementing clearing solutions for new products can be challenging and time-consuming and Deutsche Bank wants to be a trusted partner to our clients in this endeavor.

As the adoption rate increases and the product matures, I expect to see a feedback loop that leads to more standardization and a reduction of complexity across the industry, which in turn will drive further adoption across client segments.

Visit the panel at Derivatives Forum Frankfurt on 26 February from 14:00-14:45 CET

Repo Markets in Transition

Repo markets serve as a foundational layer for broader financial markets. As excess liquidity is removed from the system through reductions in the Central Bank's balance sheet provision, Repo markets are becoming more central to buy-side investment strategies. Our panelists will discuss the impact of macro trends, the challenge of electronification and how margin efficiencies boost volumes and transparency.

• How have the dynamics of the repo market shifted over the past three years?
• Sponsored clearing in Europe is on the rise. What are the challenges and opportunities?
• What's next for the repo market in Europe?

Moderator: Alexander Westphal, Senior Director, ICMA

Speakers:

• Katja Renner, Regional Sales Manager, Eurex
• Douwe Schering, Senior Collateral & Securities Lending Manager, MN
• Florian Peter, Head of OTC Clearing, Deutsche Bank