Bahraini ‘repo’ platform targets GCC-wide trading

Reuters/Hamad I Mohammed

• Absolute Collateral platform created
• Visibility for bond trading
• Boost for international trade

A new platform focused on repurchase agreements has launched in Bahrain with the aim of increasing trading liquidity for bonds across the Gulf. 

A repurchase agreement, also known as a “repo”, is a form of short-term borrowing, mainly in government securities.

Repo transactions between banks allow them to manage their liquidity. One side with excess cash buys bonds owned by another which may need cash.

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The privately-owned platform, Absolute Collateral, aims to create visibility in an opaque market by enabling banks within each country to trade together – potentially for the first time – supported by a standardised legal trading agreement for those that require it.

“Currently what typically happens in the region is that bonds issued in the primary markets are bought and held to maturity by individuals and institutions,” Steven Griffiths, CEO and founder of Absolute Collateral which launched on 11 October, told AGBI. 

“Embedding these bonds in instruments such as repos should help to create the start of a tradable market and unlock liquidity and we believe that the platform will provide a focal point for this change to happen.”

Griffiths hopes that both GCC conventional and international banks that are already using existing international repo documentation will adopt the standardised documentation provided by Absolute Collateral.

Griffiths previously worked on the trading floors at US, European and Asian investment banks covering equity and fixed-income products for global buy and sell-side clients.

2023 has so far been a bumper year for regional debt issuance. 

GCC corporate bond issuance in the first nine months of 2023 totalled $18.7 billion, up 66 percent versus a year earlier, data from Refinitiv shows. 

Meanwhile, GCC sovereign bond issuance for the same period stood at $15.2 billion, a five-fold increase compared with the prior-year period.

Currently GCC banks tend to trade only with around 30 international investment banks – mainly in the US, UK and France. This can put them at a disadvantage: as Gulf bonds and sukuk are not their home assets, the international banks tend to not price them favourably. 

Meanwhile, for Islamic banks, new approaches looking at rehypothecation of collateral – the practice of financial institutions reusing collateral received in one transaction for another transaction – in their documentation adds counterparty diversity and help to expand their market.

Sylvain Bigaud, regional head at Euroclear, a Brussels-based securities depository, told AGBI that a platform like Absolute Collateral should offer a ready-made piece of documentation and trading environment.  

“What has been lacking in the region is a clear and harmonised legal framework for the repo market. The arrival of new collateral management trading platforms should accelerate this process,” Bigeaud said.

Bigaud said that another reason why there is currently low liquidity on secondary markets is because there are limited cross-GCC trades in the region.

This means that the banks do not actively trade between each other across the region on a regular basis. This stands in contrast to Europe where international collateral, such as Eurobonds or those issued by G7 countries, are actively traded on a cross border basis.

“The flow would pick up in the GCC if the largest banks in the region would consider trading local bonds between themselves, which would lead to establishing a deeper GCC collateral market,” added Bigaud. 

“We already noticed some flows between the UAE, Saudi, Kuwait and Bahrain which are very encouraging.”

Flows between GCC markets have been increasing over the last few years, helped especially by the launch of central counterparty clearing houses in every Gulf market.

According to Paul Voce, a repo expert and former head of repo at National Bank of Abu Dhabi, another benefit of a platform like Absolute Collateral is that it should provide transparency in trading data.

“When you trade bilaterally, there’s no transparency because it’s only you and the counterparty that are involved,” said Voce.

“But if people can view data, such as what volume [of trades] has gone through the platform on that day, that’s information that might be useful to traders and liquidity managers. For instance, if they can see a particular type of bond is trading in high volumes.”

There are also advantages of having a viable repo market for the trading of sukuk specifically. 

“Since 2010, we have been continuously assessing the development of a standardised sharia-compliant master documentation based on an underlying repo-type product structure subject to market recommendation,” Ijlal Ahmed Alvi, CEO of the International Islamic Financial Market (IIFM), a global standard-setting body.  

“Currently, sukuk are traded over the counter. The [Absolute Collateral] platform will provide further depth to the market, as well as transparency and efficiency. Availability of pricing information will assist trading across jurisdictions.”