Australian company MMADX has moved to establish what would be the first electronic exchange in Asia-Pacific solely for trading money-market securities, repurchase agreements and interest-rate products.
Money Market and Debt eXchange (MMADX) has spent the past year working with Australian banks, institutional asset managers and technology provider List to tailor the exchange for the local market.
List already provides the software that backs e-Mid, the European electronic money market where interbank deposits and overnight index swaps are traded by 250 member banks across 29 countries. Its technology also underpins European electronic bond markets.
MMADX aims to begin operations in the third quarter subject to regulatory approvals, although it hopes to start trading money-market securities – treasury notes, bank bills, certificates of deposit, commercial paper and overnight cash – as well as repurchase agreements in July.
Sean Nunan, chief executive of MMADX, estimates the annual market turnover of these securities at A$11 trillion ($11.8 trillion) in Australia, over five times that of listed equities and options on the ASX.
He points out that while such trading has been done by phone for 40 years, technology has advanced dramatically with respect to equities, futures, foreign exchange and bond trading.
“Everything else has moved ahead, yet money-market securities, repurchase agreements and interest rate derivatives have stayed in the dark ages,” says Nunan, suggesting banks had been happy to keep it this way until the onset of the global financial crisis changed the risk management landscape.
He suggests the catalyst for change has been that regulators and banks have changed their perception of what is acceptable from a risk perspective. And he says debt-trading institutions will benefit from cost reductions by using MMADX in terms of dealing and processing trades and settlement operations.
“The work that we have been doing with Australian banks and asset managers over the past 12 months has confirmed that they do see significant efficiency and risk benefits which will accrue to them from moving the last bastion of over-the-counter trading onto electronic platforms,” adds Nunan.
He confirms that MMADX will be dealing only in Aussie dollar products to begin with, although suggests it will look to introduce these to foreign banks and asset managers.
Asked about the prospect of venturing further into Asia, Nunan adds: “Once we are established in Australia the next logical step in our evolution would be to expand into Asia. The platform and infrastructure we are establishing is a road map for us to use potentially to go into other Asian markets as well.”
However, he confirms that clearing is not a service that MMADX will look to provide. “Clearing is likely to come to the repo and interest rate derivative markets at some point. Basel III provides a strong impetus for banks because it changes the risk weighting of assets as to whether something is cleared or uncleared.
“At this stage clearing is not available for [trading money market securities and repurchase agreements] in Australia. It’s not right for us to forecast when that might happen.”
Nunan adds that MMADX is also setting out to become a so-called swap-execution facility (SEF) and Australia’s primary venue to trade interest rate derivatives.
He says a number of players will be looking to establish SEFs in various markets on the back of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which requires US financial institutions to trade swaps on an automated exchange.
“Once provisions with respect to SEFs have been finalised, that will push almost all financial institutions globally to trade swaps on a SEF,” he adds. “That is going to be a competitive market, given the size of the market. I am sure it will be heavily fought over in markets such as Singapore, Hong Kong, South Korea and Japan.”