Distributed Ledger Technology (DLT) is helping banks, broker-dealers and other financial service firms unlock intraday liquidity that can save millions of dollars in costs. DLT-powered repo solutions are arriving on the scene at the perfect time for sell-side firms looking for ways to address rising funding costs that are putting margins under pressure.
Sell-side firms use repo transactions to access liquidity. Although repo is an important tool for cash flow management, it has some serious shortcomings. The most basic of these is a fundamental misalignment in timing. Sell-side firms use repo transactions to help avoid account deficits created by huge cash inflows and outflows over the course of a business day. Usually, those deficits exist for hours, or even just minutes. However, the current market structure was not built to facilitate trades of that short a time span. Using traditional securities processing infrastructure, it’s virtually impossible to execute and settle a trade on that compressed timeframe. In fact, it’s almost impossible to settle trades on the same day. As a result, firms are forced to pay for overnight repo transactions, when they really only need the liquidity for a much shorter period of time.
Even with those overnight transactions, the funding system is not efficient enough to cover all account deficits. Every day, the sell-side pays millions of dollars in “daylight overdraft” fees to the U.S. Federal Reserve. That inefficiency didn’t rank as a top concern when interest rates were near zero and funding costs for banks and other financial service providers were low. But in today’s interest-rate environment, minimizing operational and funding costs has become a strategic imperative.
Enter DLT. New platforms from Broadridge and other providers use DLT to provide the velocity, transparency and security needed for intraday repo transactions that are radically enhancing the efficiency of cash flow management. “With Broadridge’s DLT platform, you can receive money at 9 a.m. and return it at 11 a.m.,” says Michael Walsh, Head of Capital Markets IT and Operations in the Americas for Societe Generale, an early adopter of Broadridge’s Distributed Ledger Repo (DLR) solution.
In many ways, repo represents an ideal use case for DLT: it’s a market in which many bilateral transactions executed with manual processes create big operational costs and risks. “It’s the perfect environment for a DLT solution in that distributed ledger technology solves almost all of these issues by creating a perfectly standardized approach that everyone can operate in,” says Christian Rasmussen, Head of Fixed Income Finance at Verition Fund Management LLC.
By enabling intraday repo, DLT-based solutions are transforming the way the industry accesses liquidity and manages cash flows, reducing exposure to operational and counterparty risks. “Intraday repo is an exciting development that unlocks a new avenue for more efficient risk management, which is something we think about a lot at DRW,” says Mark Wendland, COO of diversified trading firm DRW, another early user of the DLR platform. “This solution gives institutions more flexibility in their capital deployment intraday and access to new yield enhancing strategies.”
In this paper, we will examine the challenges and costs associated with cash flow management and intraday liquidity, discuss how intraday repo can help sell-side firms address these issues, and explain how DLT solutions are helping sell-side firms address or even eliminate these concerns by making intraday repo an accessible and viable mechanism for funding. We will also discuss how the buy side will benefit from the growth of intraday repo and look at how and when buy side firms are getting involved as cash providers. Throughout this report — as in this introduction — we will hear from actual users of Broadridge’s DLR platform, who will describe their experiences as early adopters of a DLT-based solution.