DTCC Connection

May 05, 2015 • DTCC Connection

Systemic importance

By Murray Pozmanter

DTCC wants to enhance the triparty repo market’s ability to navigate stressed market conditions. Murray Pozmanter explains

What is the situation with reform of the US triparty repo market?

In an effort to strengthen the resiliency of the triparty repo infrastructure, the Federal Reserve’s payments risk committee (PRC) created the Tri-Party Repo Infrastructure Reform Task Force in 2009 and asked the industry to develop a solution that would reduce reliance on intra-day credit and increase risk management practices.

The task force’s goal is to enhance the repo market’s ability to navigate stressed market conditions by implementing changes that help better safeguard the market. DTCC has worked in close collaboration with the task force on these reform initiatives.

The task force’s initial report identified key areas of focus to improve market safety: (i) achieve a substantial reduction in the usage of discretionary intra-day credit extended by the triparty clearing banks; and (ii) foster improvements in market participants’ liquidity and credit risk management practices.

At that time, the Federal Reserve announced its intention to embrace this roadmap and to use its supervisory tools to encourage its implementation by market participants. Shortly thereafter, both clearing banks—Bank of New York Mellon and J.P. Morgan Chase—announced that they were committed to completing the infrastructure work needed to achieve a settlement regime that was much less dependent on their provision of intraday credit, and would deliver improvements by the end of 2014.

FICC wants to provide central clearing for the over $1.6 trillion institutional triparty repo market—if approved, how will this work, and what will the benefits be to the market and participants?

FICC (DTCC’s Fixed Income Clearing Corporation) will enhance the triparty repo market’s ability to navigate stressed market conditions by implementing solutions that help mitigate risk and better safeguard the US financial market. FICC provides the only central clearing function for triparty repo trades in the US and is the only platform ready to serve this market.

Centralising the clearing and settlement of repo transactions through FICC will provide regulators with a broader and more comprehensive view of the repo market for the monitoring and management of systemic risk, as well as mitigate risks associated with a fire sale in the triparty marketplace.

The central clearing platform for repo clearing already exists at FICC. In fact, it’s the only infrastructure that clears repo in the US Since 1998, FICC’s GCF Repo service has seamlessly processed these types of transactions.

The plan is to leverage functionality and risk management capabilities that FICC already provides to its members and therefore, there is no need for technology or market structure changes, which would elongate the period that it would take to bring a service to market and need to go through a testing period. FICC intends to submit a rule filing with the US Securities and Exchange Commission (SEC) and an advance notice filing to both the SEC and the Federal Reserve Board in Q1 2015.

The Fed has expressed concerns over how clearing banks will handle intra-day credit extensions to the FICC to settle inter-bank GCF repo trades—how will FICC’s application help to address these concerns?

As an ongoing part of the triparty reform efforts, the inter-bank credit extension is being addressed in a separate effort. FICC is currently working with both clearing banks to introduce real-time substitutions in 2015.

What about the Fed’s concerns over FICC’s ability to handle borrower defaults?

FICC handled both the Lehman Brothers and the MF Global insolvencies seamlessly. The proposed CCIT service would provide a new liquidity vehicle to further support FICC’s ability to handle default scenarios.

 

Article first appeared in Securities Lending Times, Issue 118, 27 January 2015

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