The Depository Trust & Clearing Corporation (DTCC) announced today it would begin in 2Q 2009 to expand its central counterparty (CCP) clearing services and trade guarantee to include all the parties involved in U.S. government securities tri-party repurchase agreements (repos).
The risks, benefits and need for clearing tri-party repos were highlighted in Federal Reserve Chairman Ben Bernanke's speech to the Council on Foreign Relations in Washington, D.C., this past Tuesday.
Bernanke called for "enhancing the resilience of the triparty repurchase agreement (repo) market," and said the industry should consider "the costs and benefits of a central clearing system for this market, given the magnitude of exposures generated and the vital importance of the market to both dealers and investors."
DTCC's Fixed Income Clearing Corporation (FICC) subsidiary is the leading provider of trade comparison, netting, risk management and settlement for the U.S. government securities marketplace. In 2008, FICC cleared and settled government securities trades valued at more than $1 quadrillion, including some $300 trillion in FICC's General Collateral Finance repo service, which is geared specifically to tri-party repo activity.
Repos are financial transactions generally used for short-term funding, and typically involve the sale of a U.S. government security for cash and the subsequent repurchase of the same or a similar security. Hence the name "repurchase agreement" or repo, for short. In a tri-party arrangement, a third party functions as the agent for the transaction and hold the security as collateral.
Covering all parties
"Our central clearing system for U.S. government securities has served dealers, inter-dealer brokers and the principal agent banks for more than two decades," said Murray Pozmanter, DTCC managing director, Fixed Income Clearance and Settlement Group. "However, in order to extend the safeguards of clearing and risk management services to include all the parties in tri-party repo trades, we're seeking approval from the Securities and Exchange Commission (SEC) to expand our membership to include registered investment companies such as mutual funds and money market mutual funds, which are e a prime source of the short-term funding used in the repo market."
As new members, mutual funds will be able to take advantage of FICC's rigorous risk management process, which includes daily portfolio monitoring, intra-day collateral requirements and FICC's guarantee as a central counterparty that a government securities trade will be completed on its original terms even if one of the parties to the trade defaults.
"As soon as we receive SEC approval," Pozmanter said, "we can begin to work with the funds to expedite their connecting to our clearing system, bringing increased transparency, risk mitigation and efficiency to this market, and creating the kind of system the Federal Reserve would like to see."
As part of its SEC filing, FICC said it would require mutual funds seeking membership to have $100 million in net asset value. .
Response to crisis
Following Lehman Brothers' declaration of bankruptcy in September 2008, FICC guaranteed and completed the $190 billion worth of U.S. government securities trades still pending on Lehman's books.
"The value of risk mitigation and central counterparty protection, which was always obvious to our members, became very clear during the crisis to segments of the industry that are not members of FICC and didn't have the benefit of counterparty risk protection," Pozmanter said. "So we're essentially seeking to increase the size of our tent to allow more companies inside so that they can take advantage of the market-neutral clearing services we provide."