The past 24 months has brought major liquidity pressures, with the Q4 2019 repo spike followed by the impact of COVID-19 from Q1 2020. Then it brought massive liquidity injections from central banks. How has GLMX helped the market manage these liquidity demands through its trading platform and repo technology?
The liquidity spikes which occurred in the fall of 2019 and the spring of 2020, while disruptive to both primary and secondary securities markets, are explicable and not outsized in the context of the history of systemic liquidity management of the last three decades.
It is uncontroversial to say that deep, orderly and accessible financing markets are the cornerstone upon which the capital markets are built. Traders, treasurers, issuers, liquidity managers — both private and public — and regulators need daily access to the markets to complete their essential tasks and to keep supply and demand in balance. Historically, the Federal Reserve managed excess reserves to an accuracy of billions to tens of billions of US dollars. In today’s era of “ample reserve management”, excess reserves total in the trillions – above US$3 trillion during 2020.
One of the impacts of such significant excess reserves is that, on most days, with all that liquidity in the system, nobody thinks much about its availability as reserve liquidity is in dramatic excess to system demands. On those days in 2019 and 2020 there were external shocks to the system – tax-related liquidity demands on top of US Treasury auction settlement in 2019 and fear-based liquidity hoarding due to the COVID-19 pandemic explosion in March of 2020.
On top of those variables, the Fed’s longstanding, intra-day liquidity addition tools were long out of practice and regulatory changes made it difficult for liquidity to move from those who had it, mostly banks in their Fed accounts, to those who needed it – primarily securities companies, even many with large bank owners. Unsurprisingly, the result was higher financing yields. While GLMX harbours no illusions about telling the Fed how to implement its monetary policy, we can help to maximise market participant access to liquidity pools in situations such as those above. GLMX technology maximises liquidity location, negotiation, execution and straight-through processing in near real-time, helping market participants to identify and manage their funding needs much more quickly than if they communicated via chat, email or voice and booked trades manually.
Thus, managing the full trade flow, from inquiry initiation, negotiation, execution to straight-through processing, not just part of this process, is essential for clients to improve their funding not only in times of stress but as a matter of business as usual. An added benefit of the digitisation of securities finance execution during the COVID-19 pandemic was the enabling of “virtual trading floors” in a work-from-home environment, in which GLMX technology afforded traders, liquidity managers and risk managers the ability to monitor and execute liquidity needs in near real-time.
What lessons have you learnt during this time as a specialist provider of repo tech?
In the early days, as GLMX set on the journey to digitise the manual workflow around securities finance, we regularly ran into the argument that “this market, while admittedly inefficient and largely manual, has worked fine for many years and therefore needs no efficiency improvement”. GLMX’s view was that enhanced access and efficiency in a market as critical to the overall financial system as repo would benefit everyone involved, especially in the environment of global zero interest rates.
In those early days, we leaned heavily on the encouragement and market support of “early adopters” that shared our vision. The fact that GLMX has been, to date, a specialist in repo has been quite motivating. At GLMX, we often say, at this point with a smile, that we had no other market to fall back on. Either we became successful with repo or we failed. We also learned, especially in a world with historically low interest rates, that cost matters. As such, we have used the advantages of a super modern technology stack to minimise the cost of our technology solution. Combined, these forces have enabled us to provide a world-class technology ecosystem while maximising value pricing.
GLMX’s long standing ambition in the funding markets is not to change what is being done, but how it is being done. What are your next priorities? In which direction are your clients taking you?
That’s an accurate assessment and a great question. GLMX’s top priority has been — and continues to be — to provide a comprehensive, cost-efficient technology solution for the securities finance markets and to provide best-in-class client support. The continuous feedback we receive from our clients is that we are succeeding in doing so every day and that our reputation for excellence is driving new clients in our direction. That said, a common theme which we hear from our clients is that they would like to extend GLMX’s technology and client responsiveness to adjacent money markets.
Having said that, at GLMX we fully appreciate the dangers of broadening our product set too quickly and without significant and active client support. We recognise that each instrument within the global money markets is its own micro-ecosystem with its own unique challenges. To serve those markets as well as we do in the repo space, it is imperative that we identify the critical pain points and efficiency enhancers that will maximise adoption and value for our current and prospective clients. One market which met those criteria, and which we have actively engaged both from a technology and client perspective, is the fixed income securities lending space.
Securities lending is a very close cousin of repo and our technology naturally extends to that market. GLMX’s approach has been to identify early adopters – which is exceptionally challenging in itself – and to use their initial feedback to build essential functionality for their market needs. We then iterate to perfect our technology to provide comprehensive functionality and maximum value to those clients. This process has been ongoing for more than two years at GLMX and we are well advanced in the process with most major securities lenders.
GLMX first came to market in 2010, not long after the global financial crisis had prompted root and branch review of funding markets. As a specialist in liquidity-seeking technology solutions, how do you see funding markets changing over the coming 3-5 years?
Saying that GLMX “came to market in 2010” certainly would elicit some rolled eyes among our founders. What GLMX really did from 2010 to about 2014 was to learn how NOT to build technology for repo and other money markets! In seriousness, that often-frustrating process of identifying what it takes for clients to adopt technologies was instrumental in making GLMX what it is today.
As mentioned above, the prime directive for our clients all along has always been liquidity, liquidity, liquidity. In today’s challenging market environment, efficient access to liquidity is paramount. Given regulatory, interest rate and COVID-related challenges, market participants have opened their minds to new evolutions in securities finance markets. At GLMX, we strive to execute for the present while building technology capable of serving a future where numerous outcomes are possible.
At GLMX, we believe that the most likely 3–5-year path for financing and other money markets is the convergence of liquidity and technology. What such a notion means to us is that market participants will increasingly see, negotiate, execute, process and analyse liquidity solutions across an array of global short-term markets. The only way to realise that future is through integrated and highly flexible technology, which maximises access to liquidity and to data which support liquidity-related decision making. Whether across geographic regions, across individual funding instruments, across cleared or non-cleared alternatives or across cash and digital assets, market participants increasingly will be drawn to the massive liquidity available in integrated markets.
What does GLMX’s technology strategy look like for the next 3-5 years? How are you applying innovation to enhance the matching, workflow, connectivity, and reporting tools that you offer for repo transactions?
Three pillars which differentiate GLMX are: first, ultra-modern, flexible, customisable and intuitive technology; second, expert industry-experienced employees; and, third and most importantly, a deep and broad network of buy-side, sell-side, technology vendors and large industry utilities which have grown over several decades. We are very clear that no market consists of a single participant. By their nature, markets are at their best with a broad and diverse group of participants. The same is true of technology. While GLMX values its independence, as it allows us to maximise focus and to serve all clients equally, we fully appreciate that a growing, interconnected network of partners is integral to our clients and therefore, to GLMX’s success.
This approach to business is already clearly evident in our connections to numerous mid and back-office systems and clearing mechanisms, all to the mutual benefit of those partners and, ultimately, to our mutual clients. GLMX technology is designed to manage all types of global entities, is agnostic to trade settlement (delivery-versus-payment, tri-party, cleared, DLT), and can send trade information to multiple venues at once (for example, trading firms, tri-party agents, custodians, prime brokers, third-party technology vendors and trade repositories). We believe that such interconnectivity is the key to the future we envision.
By way of identifying some GLMX innovations specific to the securities finance market, low-touch trading and automated execution continue to evolve with several clients already doing so. The allure of such capabilities is their ability to streamline client response times, pricing and trade execution which, when combined with straight-through processing, reduce position management risk and trading errors.
Another area, still in its infancy but with interesting potential, is digital ledger technology — specifically how smart contracts can be used to capture the comprehensive characteristics of securities finance transactions which include not only trade terms but legal agreements, settlement locations, delivery instructions and more. Again, we are actively exploring partnerships with leading DLT innovators to the mutual benefit of our mutual clients.
At GLMX, we have always emphasised, over everything else, the need to understand our clients’ needs and translate the promise of new technologies to real-world solutions which maximise client outcomes. That is our past and our future.
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