Elixium set to fill gap in contracted European repo market

In a differentiation move from larger repo market competitors such as BGC Partners, ICAP and Tullett Prebon, whose broking arms are merging, the Swiss interdealer broker Tradition is set to launch a new EU-regulated Multilateral Trading Facility (MTF) for collateral and secured deposits in May 2016, for short-term financing (48 hours).

The platform, Elixium, allows institutions such as corporates, central banks, sovereign wealth funds, asset managers, pension funds, insurance companies, government institutions, hedge funds, brokers, dealers and banks, to access a credit matrix for counterparty diversification to spread risk, qualify slippage, view depth and liquidity, and varied execution methodology.

The venue will be run in the UK as a multilateral trading facility (MTF) for the lighter regulation the European legal designation is subject to. It will start trading baskets of GBP-denominated maturities, but within the next months, the platform will expand to over 40 collateral baskets covering fixed income and equities in GBP, EUR, USD, CAD, JPY and a range of emerging market currencies, so that financial institutions can raise or provide cash against collateral via a periodic fixed auction similar to an order book run by an exchange.

Elixium will be directed by Tradition fixed income trader Nick McCall, and replaces the venue DBV-X, that is moving to US custodian bank BNY Mellon, in a “soft rollout”.

“The repo and collateral market is a critical source of funding for many institutions but is balance sheet intensive. As institutions come under pressure as a result of regulatory changes such as the Liquidity Coverage Ratio and Net Stable Funding Ratio, a reduction in balance sheets has impacted the depth of liquidity available.

“By establishing a peer-to-peer network and offering full counterparty control, we are enabling greater access and price discovery for many non-bank institutions such as asset managers, CCPs, corporates and insurance firms, which are increasingly being seen as key sources of liquidity in the repo market”, said Nick McCall, Chief Executive Officer at Elixium.

Following the financial crisis, regulation and near zero interest rates have provoked the market to contract by more than 20% in Europe, with dysfunctional capital markets, namely broker dealers, having trouble to fund long or cover short positions.

In Europe, approximately 45% of the “repo” market is still traded bilaterally. Less than a third goes through cleared electronic trading, which shows a lot of room for growth given current needs of financial institutions: to lower overall exposure, alleviate capital constraints and have more positions to offset each other.

Given the complexity of how clearing houses function, including requiring additional funds from members to cover defaults but excluding fund managers from the default fund, solutions like Elixium may be what the market is looking for: cleared trades from electronic venues without the cost of clearing house membership.

While these benefits may attract many market participants, an interbank electronic order book does not provide the same discretion as bilateral solutions.

Roberto Verrillo, former Nomura trader and appointed Chief Strategy Officer at Elixium, comments: “Legacy trading models are no longer as relevant in today’s market as they once were. Financial institutions are re-structuring their product offerings and businesses in light of regulatory and structural shifts in the dynamics of how markets operate. Elixium is designed as a direct result of these changes and we hope to be at the forefront of this evolving market over the coming years.”

The company has also hired executives Gabrielli Frediani for business development, Nick Van Overstraeten (former director of fixed income at Citi) for product development, and Iona Levine (former LCH Clearing general counsel) as a special adviser.