Global clearinghouse Eurex Clearing plans to start clearing repo trades for hedge funds by mid-2024, according to a report by Bloomberg citing remarks made by executive board member Matthias Graulich at the Derivatives Forum in Frankfurt last week.
Speaking on Thursday, Graulich confirmed plans to have hedge funds on the Eurex platform “by the summer”, though the number of possible on-boarded funds was not disclosed.
According to Graulich, Eurex had initially planned the change last year but was not able to move forward due to key participants not being able to settle trades under the new framework.
Graulich added: “We have a number of hedge funds who are very interested to pilot cleared repo, and we have two clearing agents who are in close discussion with these pilots.”
Hedge funds have traditionally conducted repo transactions with banks acting as middlemen and without interaction with clearing houses, though lenders’ ability to do so have become limited by rules following the 2008 financial crisis. Now, the alternative for many funds is direct engagement with a central clearinghouse while brokers act as sponsors. The report notes LCH’s RepoClear as making a similar shift in the overall cleared repo market.
Hedge funds have made use of Europe’s €11tn ($11.9tn) repo market to increase their leverage and borrow securities from dealers with cash as collateral (and vice versa).
According to Graulich, Eurex’s buyside repo business has increased from less than €10bn in January 2022 to over €50bn by December 2023. He attributes this to quantitative tightening and declining excess liquidity making it more profitable to put cash into the repo market, when, until recently, pensions funds and governments/supranational agencies had led buyside demand for direct access to cleared repo.
Regulators have responded to newly widespread central clearing in bond and repo markets. In the US, rules making central clearing mandatory in the Treasury market (including repo transactions) were adopted by the Securities and Exchange Commission in December 2023.
In March 2020, the UK’s Bank of England said that it would have reduced gilt repo exposures on UK dealers’ balance sheets by 40% to free up liquidity for clients who needed it.
In Europe, there is speculation that regulators will introduce mandatory “haircuts” for repo collateral, which would entail more capital being set aside due to bonds posted as security being valued below market price, which Graulich believes “would increase the relative attractiveness of the cleared product” and encourage sceptics who are inclined towards the traditional repo model given the additional cost of central clearing.
