The US Repo Market: Next in Line for Electronic Trading

January 7, 2005


New York, NY, USA January 7, 2005

US Repo Markets: Next in Line for Electronic Trading

Celent predicts that approximately 40 percent of the US inter-dealer repo market will trade electronically by the end of 2007. Although significant challenges remain for e-trading in client repo markets, electronic volumes will approach 15 percent by 2007.

The US market for repurchase agreements has experienced tremendous growth in recent years. Between 1984 and 2003, the US repo market grew at an average annual rate of 16 percent. As of Q3 2004, average daily notional outstanding for US primary dealers was nearly US$5 trillion. Not surprisingly, the growth of the US repo market mirrors that of the US bond markets. Repos are an integral component of the global capital markets, and remain a key source of funding for fixed income dealers.

Unlike the US bond markets, which at one time saw as many as 70 online trading platforms jockeying for market share, the US repo market has been served by just a handful of electronic platforms. While electronic price discovery has been available for years on a variety of different broker and dealer pages, fully electronic repo trade execution is a relatively recent market development.

In a new report, US Repo Markets: Next in Line for Electronic Trading, Celent examines the growth of the US repo market as well as key trends and strategic issues affecting the development of electronic repo trading platforms. Challenges to market-wide adoption are discussed in the context of emerging e-brokerage strategies. The report also profiles several platforms, analyzing their business models and potential impact on the emerging electronic repo market.

"Repos well suited to electronic trading, particularly among major market participants" says Harrell Smith, analyst in Celent’s Securities and Investments group and author of the report. "A significant portion of traded contracts are relatively standardized and undifferentiated, while the inter-dealer market is supported by a centralized clearing counterparty. Electronic repo trading faces a tougher challenge in the fractured dealer-to-client market, which remains constrained by credit and settlement issues."

Approximately 14 percent of the inter-dealer repo market is now traded electronically. Celent expects this figure to increase to nearly 40 percent by 2007. In particular, the market for overnight Treasury-based contracts is the most liquid segment of the US repo market, and is quickly migrating to a predominantly electronic trading model. Voice trading will continue to dominate the dealer-to-client market, which currently sees negligible electronic volumes. Celent predicts that 15 percent of client-based repos will be traded electronically by the end of 2006.

The vendors evaluated in the report are BrokerTec, Morgan Stanley RepoLink, and Lehman Brothers’ LehmanLive. The report also examines potential impact of TradeWeb and eSpeed in the multi-dealer-to-client and inter-dealer markets, respectively.

The 29-page report contains 14 figures. A table of contents is available online.

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Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned operating unit of Marsh & McLennan Companies [NYSE: MMC].

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Table of Contents


New York, NY, USA January 7, 2005

US Repo Markets: Next in Line for Electronic Trading

Return to report Abstract

Executive Summary 3
Market Overview 5
  Market Size 5
  Trade Structure and Definitions 7
  Types of Repo Transactions 12
  Market Participants 14
Electronic Trading 16
  Overview and Strategic Issues 16
  Electronic Trade Volumes 18
Electronic Trading Platforms 20
  BrokerTec: An ICAP Platform 20
  Morgan Stanley RepoLink 23
  LehmanLive 24
  Other Platforms 25
Future Trends 26
  New Market Entrants 26
  Competition 26
Objectivity & Methodology 28

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