FICC Proposes Streamlined Matching For Repo Trade Submissions
In an effort to streamline trade processing and minimize intra-day credit risk for its customers, DTCC’s Fixed Income Clearing Corporation (FICC) is proposing to amend its rules to mandate “demand comparison” submission and processing for all blind-brokered repo trades.
Under “demand comparison,” intermediaries such as brokers that have been approved as “demand trade sources” can submit trades for comparison. Dealers would still submit their trades, but any blind-brokered trade submitted to the clearing corporation by a demand trade source will be considered compared upon receipt.
The proposal, which FICC is preparing to send to the Securities and Exchange Commission (SEC) for review, stipulates that only those inter-dealer brokers or other intermediaries that FICC approves can submit trades for demand comparison.
Sooner the better
Currently, repo transactions come into FICC either for traditional bilateral comparison, which requires submission from both sides to the trade, or for “locked-in” comparison, which occurs when a trade has been compared operationally before it is even submitted to FICC. Locked-in comparison, however, is only used for auction awards. The clearing corporation then steps in to take on counterparty risk and guarantee completion of the repo trades as soon as the transactions are matched and compared.
“The idea is to streamline this traditional repo trade processing by being able to compare a trade from a single data source, such as an inter-dealer broker, who has access to both sides of the trade,” said Elke Jakubowski, DTCC vice president, Clearance and Settlement Product Management. “This makes it easier to compare transactions earlier in the day. And the sooner a trade is compared and guaranteed, the sooner we can reduce the intra-day credit exposure the original counterparties have to each other.”
Built-in safeguards
FICC’s proposal also has built-in safeguards to prevent the comparison of any trade that a dealer might not recognize or approve. If a dealer fails to recognize or “doesn’t know” a trade submitted on its behalf, the dealer can send a “DK” or “Doesn’t Know” message to the demand trade source via FICC’s Real-Time Trade Matching (RTTM) system. As soon as the clearing corporation’s Government Securities Division receives such a “DK” message, the demand trade is no longer eligible for comparison.
“At this point,” Jakubowski said, “if we receive a DK, the only way the trade can move ahead for comparison is for the DK to be removed. For example, the trade would become eligible for comparison again if the dealer, after reviewing the trade, decides its DK message is in error and withdraws it.” The trade could also move on to comparison if the FICC-approved broker that originally submitted the trade data modifies the data in a subsequent submission and the two parties to the trade do not object.
“Demand” comparison is not a new concept. It has long been used for municipal bond trades if the underwriting of the bond is syndicated. When the syndicate manager submits the trade details through FICC’s RTTM system, the trade is automatically marked as matched and held for submission on settlement day.
Size can matter
“Because of the size of repo trades, they can sometimes pose a greater risk than cash trades,” said Murray Pozmanter, DTCC managing director, Clearance and Settlement Group. “Even just one or two unmatched repo trades can suddenly inflate a customer’s Clearing Fund requirements and pose risk for the clearing corporation and our other customers. That’s why we want to simplify and speed up trade comparison,” he said.
What FICC is proposing is that all blind-brokered repos must be submitted for demand processing, and the brokers will have until 4 p.m. to do so. In turn, dealers will have another half hour – until 4:30 p.m. – to DK any trade they don’t agree with. All trades coming in after the 4 p.m. cutoff time will revert to bilateral matching. @