Scott Skyrm, global head of money markets and repo for Newedge, says he always knew he'd be involved in the financial industry. In a recent interview, he speculated that when the economy does turn it will turn very quickly, and the markets will become very volatile.
1) Please describe your role at Newedge. When did you join the company?
I am the global head of money markets and repo. We have two trading/sales desks in New York, two in London and one in Paris. money market products include bank CD's, commercial paper and short sovereigns. Repo financing products include U.S. Treasuries, European sovereigns, corporate bonds and municipal bonds. I joined FIMAT in 1999, which later became Newedge.
2) What did you study in school? Was it your intention as a student to get involved with the markets? If not, what was your intention in terms of professional ambitions?
I studied economics at Lehigh University. I have a B.A. and an M.S. I always wanted to be involved in the bond market. I always knew that this would be my business. My father was in the muni bond market. At one point he ran the muni bond department at PaineWebber. When I was a kid, I would visit my dad in his office and he would let me make some (sales) calls. He would make a deal with me so that every phone call I made, I would get $1. I realized that the more calls I made, the more money I would make. It was a great lesson. I felt it was a challenge.
3) How would you describe the current interest rate environment?
My group is involved in short-term interest rates. The current environment has extremely low rates and little volatility. It is not optimal for a trading and sales desk, but we continue to add clients. In the past, periods of very low rates (1994 and 2004) were followed by significant rate volatility and rates moved higher very quickly. I can't predict when rates will move higher (Fed tightening), but when they do move higher it will be at a quick pace and the markets will be volatile. When the economy does turn, it will turn very fast.
4) Has the credit crisis of 2008 been almost shaken out of the markets and economy?
In terms of my markets (short-term interest rates), the answer is yes. The markets are normal. There's no abnormal illiquidity, but there are permanent structural changes in the markets. For instance, banks are more concerned with balance sheet and capital. There is also more stress on minimizing both and creating more synergies within a bank to maximize returns.
5) What factors are having the biggest impact on the money market space right now and on repo?
The products are becoming commoditized. The low-interest-rate environment and minimal volatility had a major impact. Dodd-Frank and Basel III will have a significant impact on the Repo market. As trading activity migrates out of banks, the activity still needs financing. Client financing is becoming a larger and more significant business for banks, while at the same time banks are pursuing strategies to financing themselves more efficiently. So liquidity and funding are much more important for banks and bank clients.
6) The over-the-counter repo market is now one of the largest and most active sectors in the US money market. Does the current economic and interest rate environment leave the money market and repo area in line to see more or less interest in coming days? Why?
Repo is my main business. The repo market continues to grow as the Treasury issues more and more securities to fund government. Secured lending will only increase in the current regulatory and liquidity concerned environment.
7) How could the use of cleared products change the OTC interest rate space?
The OTC interest rate swaps market is undergoing a process which occurred in the repo market in the late 1990's. Back then, in the repo market, banks and dealers wanted a central clearing counter party to take advantage of accounting netting practices to reduce balance sheet, and minimize counter party, risk and trade processing. The swaps market is undergoing the process now, in a similar way.
The repo market is a source of secured and cheap financing. It could prove to be important if we have a credit crisis again.
8) What new products in the space will be hot in the next year? Why?
Banks will couple/bundle more products together in exchange for financing.
In today's environment, there's little reason to provide clients with balance sheet intensive financing unless the bank is earning multiple sources of revenue.
Banks are becoming more and more like execution facilities for clients and less like "dealers."
9) What will be an important trend in the space in coming days?
Central party clearing has significant advantages. It nets out balance sheet, pools credit exposure, and reduces operational risk and processing. Ultimately, there will be one central party clearing entity that wins out over all others. It's kind of a horse race right now
10) How do you see your role developing at Newedge going forward?
We have a very successful repo and money market group. In the past, the business was developed along regional lines. In general, since the beginning of the credit crisis, clients have wanted to diversify their counterparty relationships.
We are now coordinating the business globally. We expect significant synergies and cross-selling opportunities from this strategy. We can also take expertise developed in one region and export it to another region. It's harder to coordinate business across many times zones, but the upside potential is quite significant.
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