What are the current hurdles facing the repo market, and how is your firm working to help clients combat barriers?
Central clearing will be a significant change in the US repo market. The move represents one of the most noteworthy shifts in US capital markets for decades. There are concerns over the viability of the current deadlines, the lack of a phased approach, questions surrounding the economics of providing clearing services for Treasuries and repo to clients, and information gaps, such as from central counterparty clearing houses (CCPs) which are still developing their models to process the transactions.
Further clarification and additional regulatory activity around accounting treatment, capital requirements, and cross-asset margin offsets will ultimately indicate how the market proceeds. However, in the meantime, market participants have to plan their investment in technology to increase automation and reduce overheads for the required build-out.
Onboarding, and the Know Your Client (KYC) process for clients, continues to be a challenge for the market 鈥� every counterparty has different requirements which makes it a very slow negotiations process, especially across jurisdictions and time zones. If there was a formalised market KYC process, whether all firms had to be a member of an association like the Wolfsberg Group or a centralised database based on the counterparty legal entity identifier (LEI) with KYC documentation available, it would benefit all market participants. Initiatives like the Common Domain Model (CDM) will encourage transparency and consistency across the market.
Market participants are looking at a global 鈥榝ollow the sun鈥� workflow, this will be progressively important as individual jurisdictions withdraw excess liquidity at different speeds. We are seeing firms set up trading hubs in the Middle East and expand into Asia in order to capture more market share and to diversify assets.
At MUFG, we have moved people internally and welcomed new hires to set up a trading desk in Hong Kong to price during Asian hours. We are also in the process of setting up a non-JGB repo trading desk at our affiliated Japanese entity, Mitsubishi UFJ Morgan Stanley.
How are you positioning yourself to capture new opportunities for growth within this market? Which emerging markets are showcasing an interest to further its development?
The UK and EU markets will continue their assessments in shortening the settlement cycle to T+1 and I believe we will see significant development in repo transactions involving digital cash, digital securities, and tokenisation of traditional securities.
At MUFG, we are actively expanding our geographical footprint across Asia, with our new Hong Kong desk being a prime example. This positions us to better serve clients in these growing markets and capitalise on the region鈥檚 increasing importance in global repo flows. We are also investing heavily in our technology infrastructure to ensure we can seamlessly integrate with the digital innovations that are reshaping the market.
In terms of emerging markets, we are seeing considerable interest in developing repo markets across Southeast Asia, particularly in Indonesia and Malaysia. These markets are looking to establish more sophisticated financial infrastructures, and repo plays a crucial role in providing liquidity and supporting their government bond markets. India is also making strides in enhancing its repo framework, which presents interesting opportunities for international players.
The ECB recently published its Euro Money Market Study 2024. How do you interpret the findings regarding the euro repo market activity and trading volumes?
The European Central Bank鈥檚 (ECB鈥檚) 2024 Euro Money Market Study reveals fascinating trends in the euro repo market. What stands out is the robust growth in secured transactions, with volumes increasing by approximately 12 per cent compared to the previous year. This growth occurred despite challenging economic conditions, which I believe underscores the essential role that repo plays in maintaining market liquidity.
The study shows that over 70 per cent of euro repo transactions are now being executed through electronic platforms, representing a significant shift from voice trading. This digitalisation trend aligns with what we are seeing globally, as market participants seek greater efficiency and transparency. The data also indicates a growing concentration of activity among the largest market participants, which raises some questions about market diversity and resilience that regulators may need to address.
Another key insight from the study is the increased prevalence of centrally cleared transactions, with CCPs now intermediating over 60 per cent of euro repo trading. This shift toward central clearing reflects both regulatory pressure and risk management considerations in a post-crisis world. At MUFG, we are helping our clients navigate this changing landscape by enhancing our clearing capabilities and providing guidance on optimal clearing strategies.
The study highlights changes in collateral usage patterns. How do you see these evolving, and what implications might this have for market participants?
The ECB study presents some notable shifts in collateral usage within the euro repo market. There has been a diversification away from core eurozone government securities toward a broader range of collateral, including regional government bonds and high-quality corporate debt. This trend reflects both yield-seeking behaviour and the relative scarcity of traditional collateral in certain periods.
The study shows a nearly 20 per cent increase in the use of non-government collateral compared to pre-pandemic levels. This is significant because it indicates that market participants are becoming more comfortable with a wider collateral spectrum. At MUFG, we are seeing clients increasingly exploring collateral optimisation strategies to make the most efficient use of their assets.
What is particularly interesting is the geographical dimension to this trend. There has been stronger demand for collateral from peripheral eurozone countries, reflecting changing risk perceptions and yield differentials. The study also points to seasonal patterns in collateral usage, with quarter-end and year-end still showing pronounced effects on both availability and pricing.
For market participants, these changing collateral patterns mean they need to be more flexible and sophisticated in their approach. Those who can efficiently manage a diverse collateral pool will have a competitive advantage. We are also seeing this drive investments in collateral management technology, as manual processes simply cannot keep pace with the increasing complexity.
The study discusses the impact of monetary policy normalisation on repo rates and market functioning. What has been your experience with this transition?
The monetary policy normalisation process outlined in the ECB study has indeed created both challenges and opportunities in the repo market. As the ECB has unwound its asset purchase programmes and raised interest rates, we have observed increased volatility in repo rates, particularly around key dates such as reserve maintenance periods and quarter-ends.
The study notes that the spread between repo rates and the ECB鈥檚 deposit facility rate widened during certain periods, which aligns with our observations. This widening reflects changing liquidity conditions and collateral values in the market. The transmission of monetary policy through the repo market has generally been effective, though not always smooth.
From our perspective at MUFG, the normalisation process has led to a welcome return of more market-determined rates after years of distortion from extraordinary monetary policy measures. However, it has also required market participants to adapt rapidly to a new environment after becoming accustomed to excess liquidity conditions.
One interesting aspect not fully captured in the study is the asymmetric impact across different market segments. While some areas have transitioned smoothly, others have experienced more friction. For instance, the specialness premium for certain benchmark securities has increased significantly during this normalisation phase, creating both trading opportunities and funding challenges.
For our clients, we have emphasised the importance of scenario planning and maintaining flexible funding strategies to navigate this transition. The path to normalisation is not complete, and we expect further adjustments as central banks continue to recalibrate their approaches in response to economic conditions.
The report discusses developments in market structure, including the role of CCPs and trading venues. How do you see market infrastructure evolving to meet future needs?
The ECB study correctly identifies the growing importance of market infrastructure in the euro repo space. Central clearing has become increasingly dominant, with the report showing that over 60 per cent of transactions are now cleared through CCPs. This trend is likely to continue as regulations further incentivise clearing and as participants seek to optimise capital usage.
What is particularly noteworthy is the acceleration in electronic trading. The study reports that nearly three-quarters of euro repo transactions are now executed electronically, which represents a significant transformation from just five years ago. At MUFG, we have invested substantially in our electronic execution capabilities to ensure we can provide liquidity across multiple venues.
Looking ahead, I believe we will see further consolidation among trading platforms, as scale becomes increasingly important. The study hints at this trend, noting increased concentration in trading volumes across fewer venues. This consolidation could potentially raise concerns about systemic risk, but it also creates opportunities for efficiency gains.
Another infrastructure development that deserves attention is the push toward shorter settlement cycles. While the study does not extensively cover this aspect, the industry鈥檚 move toward T+1 settlement in equities will inevitably impact related repo markets. This shift will require significant infrastructure upgrades and process redesigns.
I also anticipate continued innovation in post-trade services. The study mentions improvements in interoperability between triparty agents, and we are seeing growing interest in services that help optimise collateral usage across multiple locations and legal entities. These developments are crucial as regulations like NSFR make efficient collateral usage more important than ever.
Finally, as mentioned earlier, we should expect significant development in infrastructure supporting digitalised securities and tokenised assets. These innovations could fundamentally transform how repo transactions are executed and settled, potentially reducing costs and increasing transparency.
The ECB study mentions emerging trends in term structure and maturity for repo transactions. What implications does this have for liquidity management strategies?
The ECB study presents some fascinating insights into the evolving term structure of the euro repo market. There has been a notable increase in the average maturity of transactions, with the proportion of trades beyond one-week maturity growing by around 15 per cent compared to previous years. This extension in duration reflects both improved confidence in counterparties and strategic shifts in liquidity management.
For market participants, this maturity extension has significant implications. Traditionally, the repo market has been heavily concentrated in overnight transactions, but the growth in term transactions provides more stability for funding profiles. At MUFG, we are helping clients leverage this trend by structuring term repo facilities that provide funding certainty while optimising capital usage.
The study also highlights seasonal variations in maturity preferences, with notable contractions around reporting periods followed by extensions immediately after. This pattern creates both challenges and opportunities for liquidity managers. The more sophisticated market participants are developing strategies that anticipate these cycles, using them to optimise funding costs and collateral usage.
Another important observation from the data is the growing divergence between interbank and direct-to-customer (D2C) maturity profiles. The average maturity in D2C transactions has extended more significantly than in interbank trades, reflecting different risk appetites and regulatory treatments. This bifurcation creates interesting arbitrage opportunities for institutions operating in both segments.
Looking forward, I believe central bank policy will continue to influence maturity preferences significantly. As monetary policy normalises further, we may see additional extension in average maturities as market participants lock in rates and prepare for potential volatility. This evolution will require adaptive liquidity management strategies that can respond to changing term structures while maintaining necessary flexibility.
For treasury departments and asset managers alike, these developments emphasise the importance of sophisticated term structure analysis when formulating repo strategies. The one-size-fits-all approach to repo maturity is increasingly obsolete in today鈥檚 market environment.
How do you assess the outlook for the repo market in 2025?
Traditionally, repo has remained unaffected by significant changes, regulations and development, while other markets have evolved beyond comparison. It is an exciting time for the repo market, provided market participants remain dynamic and nimble to adjust to market conditions and changes.
We are seeing notable trends in repo primarily driven by economic uncertainties, regulatory shifts, and market dynamics in the US. and global financial systems.
In April 2025, the US repo market remained liquid and open, which helped bond markets manage volatility stemming from broader economic uncertainties, such as trade tensions and tariff announcements. Unlike previous stress events (e.g. September 2019 or March 2020), the repo market did not exacerbate liquidity shortages, largely due to increased adoption of cleared repo transactions. Central clearing has enhanced market stability by reducing counterparty risk and improving transparency.
Reverse repo volumes at the Federal Reserve saw significant fluctuations. By mid-April, the overnight reverse repo facility dropped to a low of US$54.8 billion, the lowest since April 2021, raising concerns about diminishing excess liquidity in the financial system.
However, by mid-May, reverse repo volumes rebounded to US$109 billion, indicating a partial recovery in cash parking by money market funds and other participants. This volatility reflects ongoing adjustments to liquidity conditions as the Fed continues its quantitative tightening policy.
Repo market volumes surged with a significant portion driven by hedge funds leveraging Treasury securities for short-term financing. This trend continued into April and May 2025, with high transaction volumes reflecting increased reliance on repo for funding speculative trading strategies. The growth in volumes has occasionally strained dealer balance sheets, contributing to periodic funding pressures.
The announcement of new US tariffs in early April 2025, particularly targeting China, introduced volatility in financial markets. While repo markets absorbed this volatility, funding pressures were observed, particularly for highly leveraged hedge funds. These pressures were not severe enough to disrupt market functioning but highlighted the market鈥檚 sensitivity to macroeconomic shocks.
The repo market continued to modernise, with increased adoption of cleared repo transactions driven by regulatory pushes and market efficiency goals. Discussions around potential exemptions of US Treasuries from the Supplementary Leverage Ratio (SLR) calculations were ongoing, which could further support bilateral repo markets if implemented. However, these regulatory changes were not expected to be resolved until later in the year.
FICC鈥檚 Government 兔子先生Division (GSD) hit a new peak of over US$11 trillion on 9 April, successfully processing US$11.4 trillion in transactions (an 8.88 per cent increase from the prior peak of US$10.47 trillion on 28 February 2025).
On 9 April, FICC reached a new peak volume of 1.206 million transactions (a 23 per cent increase from the previous peak of 978,000 transactions on 7 April 2025) Q1 2025 monthly FICC volume averages were 4 per cent higher than the previous quarter and 32 per cent higher year-on-year.
MUFG has partnered with the London Reporting House to contribute our SFTR data, and receive access to anonymised, granular, detailed and timely data utilising the LRH鈥檚 repo analytics tools to provide a deeper view of the market.
In the UK, the Bank of England is exploring reforms to enhance gilt repo market resilience, with a discussion paper planned for later in 2025. The new system is expected to generate income, reducing public sector financial burdens. This could influence global repo markets by setting a precedent for central bank-led liquidity solutions.
Technology will continue to drive market evolution. The efficiencies gained through automation and electronic trading will further compress margins, making scale and operational excellence even more important. We will also see more concrete applications of distributed ledger technology (DLT) in repo, moving beyond pilot programmes to real commercial implementations, particularly in areas like intraday liquidity management.
From a market dynamics perspective, I expect continued normalisation of repo rates as central banks further reduce their balance sheets. This should create more trading opportunities but also potentially more volatility. Market participants will need to be increasingly sophisticated in how they approach collateral management, as the value of optimisation will increase in this environment.
Finally, sustainable finance will increasingly influence the repo market. We are already seeing growing interest in green repos and sustainable collateral frameworks. I expect this trend to accelerate, with potential regulatory incentives for transactions involving ESG-aligned collateral.
In summary, 2025 promises to be a transformative year for the repo market. Those institutions that can navigate the complex regulatory landscape, embrace technological change, and adapt to evolving market structures will be well-positioned to thrive.
What advice would you give to market participants preparing for upcoming changes to regulation and technology?
For market participants preparing for these changes, I have several key recommendations. First, do not underestimate the operational impact of central clearing implementation in the US and the potential ripple effects globally. Start preparing now by reviewing your clearing relationships, understanding the economic implications, and identifying any technology gaps in your infrastructure.
Second, accelerate your digitalisation efforts. The ECB study clearly shows the market is moving rapidly toward electronic execution and automated processes. Firms that remain reliant on manual workflows will find themselves at a competitive disadvantage. I would recommend prioritising investments in straight-through processing and API connectivity.
Third, develop a comprehensive collateral optimisation strategy. As regulations make efficient collateral usage more important and as the collateral landscape diversifies, the ability to mobilise and allocate collateral effectively will become a key differentiator. This might require investments in technology but will pay dividends in reduced funding costs and improved capital efficiency.
Fourth, do not overlook the T+1 settlement initiatives in the UK and EU. These will compress settlement timeframes and potentially create new operational risks if your processes are not prepared. Review your entire trade lifecycle to identify potential bottlenecks and address them before they become problems.
Finally, stay engaged with industry groups and regulators. The pace of change is accelerating, and it is crucial to have early visibility into emerging regulations and market practices. Active participation in industry consultations can also help shape outcomes in ways that benefit the broader market.
At MUFG, we are partnering closely with our clients on all these fronts, providing not just execution services but strategic advice on navigating this complex and evolving landscape. The changes present challenges, certainly, but also significant opportunities for those who prepare effectively.
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