Traders Startled as Repo Shop Joins Elite Wall Street Bond Club

Traders Startled as Repo Shop Joins Elite Wall Street Bond Club

ASL Capital Markets Inc. took the U.S. bond market by surprise this week when it joined the elite club of dealers authorized to do business directly with the Federal Reserve Bank of New York.

While key traders at the company have deep roots on Wall Street and decades of experience working for so-called primary dealers, ASL is a name unfamiliar to many people outside the market for repurchase agreements. It’s certainly lesser known than global banks such as Goldman Sachs Group Inc. and JPMorgan Chase & Co. that constitute most of the existing roster of dealers.

Until now, the Stamford, Connecticut-based organization has been mainly known as a specialist in so-called repo, which involves financing positions in Treasury and U.S. agency mortgage-backed securities. In its new role as primary dealer though -- one of just 25 -- it will be front and center in the Treasury market and will be required to bid at U.S. government debt auctions.

“For them to add primary dealer to their name will probably give them a lot more recognition and open up more customers as there’s a lot more customers that will trade with you if you are a primary dealer,” said Scott Skyrm, executive vice-president at Curvature Securities, a firm focused exclusively on the repo market.

According to Securities and Exchange Commission filings from 2017 onward, ASL was founded as a repo-trading firm and began making markets in Treasury securities in 2019. To become primary dealers, securities firms have to demonstrate the ability to underwrite Treasury auctions. And while the history of the Treasury market is littered with examples of primary dealers that collapsed -- including Bear Stearns and Lehman Brothers -- the designation still carries prestige and the promise of new opportunities.

ASL is the first addition to the New York Fed’s primary dealer list since Amherst Pierpont in 2019. Competitors were blindsided, but not mystified by the announcement. Several said they expected it eventually, just not so soon. A spokesperson for the New York Fed declined to comment about the addition of ASL as a primary dealer.

ASL declined to make anyone available to answer questions or to respond to an emailed list of questions after announcing its primary-dealer status in a statement on April 4. While its deepest roots go back to the securities arm of UBS Group AG in Stamford, some of its key people have associations with MF Global Holdings Inc., which became a primary dealer in 2011 and went bankrupt later that year, and with Aladdin Capital Holdings LLC.

Its executives include Mark Gannon, Macdonald Budd and James Levenson, who worked together at UBS between 2000 and 2010, and subsequently at MF Global, based on information from the Financial Industry Regulatory Authority. Evan Gerhard, the company’s president, and Michael Weir, a managing director in the repo business, also worked at UBS. According to the statement ASL is a minority-owned business.

ASL’s parent company is Aladin Secured Lending. A person who answered the phone at Aladin Secured Lending referred calls to an external spokeswoman, who said the firm wouldn’t answer questions. A profile on LinkedIn identifies Aminkhan Aladin as chairman Aladin Secured Lending and an individual by that name was also the founder of Aladdin Capital Holdings LLC, which in 2012 settled SEC claims that it misled investors in collateralized debt obligations. 

Treasury Liquidity

For the Fed, adding primary dealers may help avert market dislocations that have cropped up in recent years, said Kevin McPartland, head of market structure research at Greenwich Associates.

Insufficient capital allocated to Treasury trading can lead to liquidity crises, as happened most recently in March 2020. The onset of the Covid pandemic sparked a global flight to cash that the banking system wasn’t able to handle. Ultimately the Fed was forced to step up with an asset-purchase program under which it bought nearly $3 trillion of Treasuries. That program ended last month, and with the central bank likely to begin outlining plans for balance-sheet shrinkage soon, the Treasury market has begun to display signs that liquidity is ebbing.

“Volatility does genuinely seem now to be hurting liquidity in the Treasury market,” McPartland said. “That was not always the case, as in the past volatile markets would bring in more players as there were more opportunities to make money.”

The New York Fed in November 2016 cut its minimum net-regulatory capital for primary dealers to $50 million from $150 million. ASL in its most recent SEC filing reported net capital of $151 million.

“The more the Fed diversifies its primary dealers from the big broker-dealers the better,” said Peter Yi, director of short-duration fixed income and head of credit research at Northern Trust Asset Management. 

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