Laura Klimpel, DTCC Managing Director, Core Business Development, spoke at the recent Finadium webinar: FICC Sponsored Repo in 2021, elaborating on how FICC’s Sponsored Service has become an integral part of the U.S. repo market, as well as upcoming enhancements to the product. Sponsored Service offers eligible clients the ability to lend cash or eligible collateral via FICC-cleared DVP repo throughout the day.
“FICC’s Sponsored Service has been in existence since 2005 - expansions in 2017 and 2019 significantly increased the number of participants in the cleared product, and with the proposed expansion, we will again likely see an increasing number of market players able to participate in the cleared product," said Klimpel.
FICC was created in 2003, bringing together the former stand-alone Government Securities Clearing Corporation (GSCC) and Mortgage Backed Securities Clearing Corporation (MBSCC) as two united divisions under FICC, the Government Securities Division (GSD) and the Mortgage Backed Securities Division (MBSD). The Government Securities Division (GSD) of FICC provides real-time trade matching, clearing, risk management and netting for trades in US Government debt issues, including repurchase agreements or repos. Securities transactions processed by FICC's GSD include Treasury bills, bonds, notes, zero-coupon securities, government agency securities and inflation-indexed securities.
Changes instituted to Sponsored Service in 2017 allowed the participation of all sophisticated qualified institutional buyer clients to place cash or collateral in the product as Sponsored Members. And again, in 2019, membership was broadened as to who could apply to become Sponsoring Member to include an expanded set of full-service Government Securities Division (GSD) members. As a result of these expansions, there are 25 live Sponsoring Members and 1,906 Sponsored Members from 20 approved jurisdictions. Daily volume is approximately $250-$300 million per day and peaked in March 2020 at $564 billion.
Recently a more diverse set of players have shown interest in the Sponsored Service. In addition to traditional Sponsored Member clients like money market funds and hedge funds, there is also increasing demand for the cleared product from a broader set of institutional clients, looking for ways to expand their toolkit—interest is expanding past U.S. borders to Asia, Europe and the Middle East.
To better service clients, FICC continues to expand the capabilities of the Sponsored Service. The new Sponsored General Collateral (GC) service will allow Sponsoring Members to transact repo trades with their Sponsored Members on a GC basis in tri-party.
Term repo is attractive to Sponsoring Member and their Sponsored Members due to its increased yield opportunity and security of funding; it also provides a stabilizing effect and helps reduce rate volatility. However, term repo has some operational challenges for cash investors. In response to these challenges, the Sponsored GC service will allow Sponsoring Members to novate triparty trades they execute with their Sponsored Members in eligible Generic CUSIPs.
An attractive option for both traditional and non-traditional clients, Sponsored GC will also allow for overnight and term, as well as forward trade activity, and enabling Sponsoring Members and their Sponsored Members to transact beyond Treasuries and into Agency MBS collateral.
Sponsored GC and GCF Repo
GCF Repo and Sponsored GC are separate products, but with identical Generic CUSIP shells, in order to allow the two products to be leveraged in concert with each other. Trades would be novated to FICC and be eligible for balance sheet netting. This design maximizes both products' capital efficiency opportunities by making them compatible and also provides more flexibility to Sponsoring Members.
GCF Repo is a cleared triparty product designed for blind interdealer broker screened trading between dealer GSD members, with all trades being done at par with no haircut. The new Sponsored GC Service was tailor-made to fit the Sponsoring Member-to- client relationship. Transactions are known trades and eligible only if between a Sponsoring Member and their Sponsored Member client. Sponsored GC trades will be allowed to be executed with a haircut beyond the value of cash.
FICC is targeting the end of Q2 2021 for the Sponsored GC product, subject to regulatory approval. Klimpel stated, “We’re excited about the expansion of Sponsored Service and the recent diversification of clientele.” More onboarding with prospective Sponsored Members is expected over the next 12 months, which is anticipated to include agency lending activity, foreign clients, supranational central banks, municipalities and home loan banks.