Often perceived as an antiquated part of the financial system, money markets are beginning to embrace a more digital future. New solutions have emerged that better connect institutions across borders. And a younger generation of corporate treasurers are turning to screens that provide live pricing and deeper liquidity for borrowing and lending in the unsecured market.

So how will this all play out? Here are my five predictions.

Money markets will be digitized

Money markets are enormous. Yet, traders continue to rely on counterparties they already know or the services of a small handful of voice brokers. While this is beginning to change, it’s a long road to a more digitized future as the numbers show.

It is a EUR 114 BN a day market in Europe alone. [1]

Approximately EUR 57 BN a day (50%) is handled through direct trading.

Roughly EUR 42 BN a day (35%) is voice-brokered.

That is a lot of trading that never sees an electronic central limit order book (CLOB). This creates a highly manual and opaque market where institutions can struggle to obtain adequate pricing information.

But the real problem with this model was unveiled during the 2008 financial crisis, where a breakdown of trust between financial institutions triggered a massive liquidity shortfall in the inter-bank lending market.

Fast forward to today and platforms are finally gaining ground. These providers offer greater price discovery, market transparency and proof of best execution (a key requirement nowadays by both clients and regulators).

Adoption will only pick up in 2019 as more financial institutions tap into liquidity on an order book that gives them greater visibility of the entire market.

More of the market will trade globally

A by-product of voice broking and direct trading is that liquidity is fragmented and clustered by region. Despite the huge size of money markets, 45% of these transactions still occur within the same country within the euro area.[2]

But as the market becomes more and more digital, platforms are starting to connect a growing number of asset managers, pensions funds, corporates and banks across national borders and sectors.

And as volumes grow, so will the value of data generated from RFQ enquiries and trades on the platform. This opportunity will not be lost on savvy financial institutions looking for an edge in money markets.

Demand for intraday trading will jump

To date, financial institutions have been required to prove their financial robustness to regulators once a day (at the end of each trading day). However, new liquidity standards set out by the European Central Bank (ECB), expected to come in force in 2019, will require continuous disclose of liquidity risk levels during all times of the day.

This is expected to have an immediate impact on demand for intraday trading with maturities of hours, rather than weeks, months or years.

Dollar funding internationally will continue to pose challenges

Access to US dollar funding continues to put further pressure on European banks, especially smaller ones, given the tougher credit environment.

While the dollar is often the currency of choice for companies in Europe – non-US banks are overall twice as dependent as U.S ones on wholesale/short-term deposits for their overall dollar balance sheet.

Due to a lack of dollar funding internationally, many financial institutions must rely heavily on less stable funding sources to support their international dollar balance sheets, such as interbank deposits, commercial paper and swaps.

This will continue throughout 2019.

New solutions will enter the market – I.E Distributed Ledger Technology (DLT)

Corporate treasurers and other financial professionals operating in money markets are starting to turn to new solutions. One of these areas is of course blockchain technology. But it remains at a relatively early stage across the industry.

The technology has a potentially transformative application in secured money market trading, a more complex market that is harder to manage via conventional electronic platforms. We are already exploring how DLT can be used in money markets and expects to announce more concrete developments in due course.

By Daniel Sandmeier, CEO, Instimatch Global

[1] European Central Bank, Euro money market statistics: second maintenance period 2018, May 2018

[2] European Central Bank, Euro money market survey, Chart 12, September 2015