FICC seeks regulatory approval to offer clearing in tri-party repo market
The Fixed Income Clearing Corporation (FICC) is seeking regulatory approval from the Securities and Exchange Commission (SEC) and Federal Reserve to provide centralised clearing for the $1.6 trillion institutional tri-party repo market.
The Federal Reserve’s Payments Risk Committee sponsored the creation of the Tri-Party Repo Infrastructure Reform Task Force in 2009 and asked the industry to develop a solution that would reduce reliance on intraday credit and increase risk management practices. It is hoped this will improve the US tri-party repo market’s ability to navigate stressed market conditions. Regulators are particularly focused on the role played by J.P. Morgan and BNY Mellon, which sit in the middle of many of these repo transactions and unwind them at the end of the day.
FICC, a subsidiary of the Depository Trust & Clearing Corporation (DTCC), argues it can leverage its existing risk management and trade guarantee services for the institutional tri-party repo market. It highlights its central counterparty clearing (CCP) offering will improve operational efficiency, guarantee completion of eligible trades and lower the risk of a liquidity drain in the event of a dealer failure by extending its netting services.
“Centralising the clearing and settlement of repo transactions through FICC could potentially help to prevent another squeeze in tri-party funding such as the one observed in 2008 when funds sharply reduced their lending during the run up to the Lehman failure. It would also 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 tri-party marketplace,” said Murray Pozmanter, managing director and head of clearing agency services at the DTCC.
There is speculation other firms including The CME Group and LCH. Clearnet could expand clearing to some repo trades.
Nonetheless, banks are scaling back on their use of repo due to Basel III capital requirements. The Federal Reserve is also now a major player in the reverse repo space as part of its efforts to influence interest rates.