FICC Resurrects Inter-Bank Market For Repurchase Agreements
After a five-year shutdown, the Fixed Income Clearing Corporation (FICC) re-opened its General Collateral Finance (GCF Repo®) repurchase agreement service May 8 to brokers whose customers settle their transactions at different settling banks.
Since 2003, brokers had been restricted from executing GCF Repo agreements with their customers unless both customers could settle the transaction at the same settling bank. The resumption of the inter-bank service, which followed the Securities and Exchange Commission’s approval last month of an FICC rule filing, is expected to bring increased liquidity and volume to the repo market.
Benefits of the service
FICC’s Government Securities Division initiated the GCF Repo service a decade ago in conjunction with The Bank of New York and JPMorgan Chase, the two banks that specialize in settling transactions involving U.S. government securities. The service allows dealers to trade GCF Repos throughout the day anonymously via inter-dealer brokers that clear and net their transactions through FICC.
Widely used for flexible short-term financing, the GCF Repo service grew quickly because it allows for expanded trading time, greater flexibility on collateral and increased liquidity for market participants. Since the repos can be netted in the clearing process, they also offer reduced transaction costs.
In 2007, trading in GCF Repos averaged $374 billion a day.
Separate market segments
“This market has had to operate in two separate segments since 2003. Restarting the inter-bank market for these repos will undoubtedly broaden the liquidity and trading opportunities for all the market participants,” said Murray Pozmanter, DTCC managing director, Clearance and Settlement Product Management.
Fund transfer problems
The limitation against inter-bank dealing was put in place to address risk issues that arose during the daily transfer between the two banks of the funds involved in the repos.
To reinstate the inter-bank service, FICC worked with the two settling banks to create a new set of rules and procedures to balance out the intra-day fund movements involving GCF Repo transactions. Under the new rules, what had been a routine of morning and evening fund transfers between the banks is now netted into a single inter-bank movement of money at the end of the day.
Responsibility for collateral
In place of the separate fund payments, inter-bank dealers at whichever bank is a net borrower on any given day will give FICC an interest in the securities and deposit accounts they maintain at that bank. FICC will then give the other bank, which was supposed to receive the funds, an interest in the collateral. FICC has also increased the collateral it requires its broker/dealers to post each day in order to clear their transactions.
When the fund transfers between the two banks are netted at the end of the day, FICC releases the collateral holds against the dealers as that day’s transactions are settled.
FICC, in conjunction with the two settling banks, has also built some “circuit breakers” into the new system in case trading volumes soar past certain levels. As part of the resumption of inter-bank service, FICC has discretion to declare a “GCF Repo Event,” which would automatically trigger position curbs and other disincentives to dampen trading volume. @