Treasury Today Country Profiles in association with Citi

Voice brokerage finally facing up to digital challenge

Person dialling whilst holding the handset

Trade in the c.€114bn a day European unsecured institutional money market – one of the last bastions of voice trading – is finally waking up to the potential of digitisation.

According to the most recent ECB money market survey (2015), half of responding banks say the unsecured euro money market is either not efficient or of limited efficiency. With the unsecured market being formed of 50% bilateral direct trading and 35% voice brokerage, almost half of which is carried out in individual countries, it is perhaps time the use of electronic trading is stepped up, as has been seen in other markets.

Although electronic request for quote (RFQ) platforms already exist, there is still a need for more transparency in the market, says ex-banker, Daniel Sandmeier, CEO of Instimatch Global, a platform provider aiming to disrupt this space.

By connecting counterparties directly and being the first platform to offer live streaming prices for unsecured short-term borrowing and lending, Sandmeier believes the European market is now set to exploit the possibilities of digital.

With 33 corporate, bank and asset managers live on Instimatch, the platform, first established two years ago by a former broker and two fixed-income traders, is making inroads into the traditionally-minded unsecured trading space (with secured market trading on the roadmap).

Matching needs

Following the post-2008 financial crisis liquidity squeeze, the idea was to create a platform that could connect and manage the price visibility of a diverse spread of counterparties. Ranging from corporate treasuries to institutional lenders to large family offices (via their fiduciary banks), the aim is to unlock liquidity across different sectors and geographies in a fully transparent trading environment.

“Trading is still very much a voice-brokered and people-managed business; there’s nothing that has been fully digitised so far. We are digitising one of the least developed parts of the financial market,” explains Sandmeier.

With huge market volumes, most trading being restricted to certain jurisdictions and banks dominating the market, treasurers across different industries cannot easily connect to match excess cash with need for cash, he notes. “If we manage to get a diverse set of counterparties onto the same platform we’ll get tighter spreads, deeper markets, and improved deal execution for a lower cost (around half the cost of traditional voice brokerage).”

According to Moodys, the non-financial company EMEA cash pile climbed to €974bn, with cash relative to revenue hitting a seven-year high in 2017. Unlocking more of this creates a deeper market for treasurers. “There’s great potential in introducing counterparties that have never traded with each other before,” comments Sandmeier.

Of course, many treasurers have historically preferred to work with a small, select group of counterparties because it is part of their relationship deal or share-of-wallet arrangement. Previously, this objection may not have easily been overcome, admits Michael Schmidt, Executive Chairman of Instimatch.

But he points out that as the world digitises, more lending and borrowing alternatives are emerging and transparency and counterparty diversification are becoming firm policy requirements. Although ‘best execution’ does not impact money markets on a regulatory level, it is becoming increasingly interesting for stakeholders, to the point where it becomes much more difficult to justify those cosy relationships, on either side.

Digital disruptor

At an individual market participant level, a digital platform that can capture and analyse trading data over time from its electronic blotter gives users the kind of intelligence that can support and enhance their future trading actions.

At a macro level, having a wider range of market participants on a single platform could have positive implications for market robustness. In the event of another liquidity squeeze, having a mechanism that is broad enough and sufficiently transparent to alert unsecured market participants, and even central banks, to anomalies in individual countries or sectors would be advantageous to all.

Instimatch appears to offer the transparency and unsecured market breadth, if it does not yet have the reach (it is working on that). But as a platform aimed at disrupting a somewhat reactionary European market, it may be time for treasurers to experience what Sandmeier describes as a “loosening of the boundaries” and see what can be achieved beyond traditional voice and trading.