GCF repo settlement reform to extend into 2016
29 June 2015 New York
Image: Shutterstock
The last leg of the Tri-party Repo Infrastructure Reform Task Force’s seven-point roadmap for reform, the full alignment of general collateral finance (GCF) repo settlement with the new triparty settlement process, still needs to be completed, according to the Federal Reserve Bank of New York.
The New York Fed provided an update on the implementation of the now-disbanded Tri-party Repo Infrastructure Reform Task Force’s seven-point roadmap for reform on 24 June.
A key aspect of the reform roadmap, finalised in 2012, was to drastically reduce the share of triparty repo volume that is financed with intra-day credit from a clearing bank. BNY Mellon announced in early May that this had been achieved: the secured credit extended in the triparty repo market was reduced by $1.44 trillion, or 97 percent, resulting in the practical elimination of such credit in its programme.
Acknowledging this success, the New York Fed said in its statement: “As a result, the share of triparty repo volume that is financed with intra-day credit from a clearing bank has dropped markedly, from 100 percent as recently as 2012, to a level averaging 3 to 5 percent today (as compared with the task force’s original target of no more than 10 percent). Clearing banks, dealers and investors all made changes to their practices and processes that helped to achieve this goal.”
But the last point of the task force’s roadmap, the full alignment of GCF repo settlement with the new triparty settlement process, still needs to be completed.
“The settlement process for the majority of GCF repo trades that occur between dealers at the same clearing bank is largely aligned with the reform goals; minimal intra-day credit is used, and settlement occurs between 3:30pm and 5:15pm,” explained the New York Fed.
“However, the subset of GCF repo transactions that occur between dealers at different clearing banks are still unwound at 8:30am, and still require uncapped, discretionary extensions of intra-day credit by the clearing banks to settle. This is a potential source of market instability in periods of stress.”
“When triparty repo lenders reduce the provision of financing to a repo borrower, the borrower may seek to obtain funding in GCF repo, where trades are arranged anonymously by inter-dealer brokers. In a full-blown stress event, GCF repo usage, and the associated intra-day credit needed to settle that GCF repo activity, could balloon suddenly and significantly, to levels that a clearing bank is unwilling or unable to support through the provision of the necessary intra-day credit.”
The GCF task was supposed to be completed this year, but the New York Fed has admitted that “the work required to align settlement of these inter-bank GCF repo trades with the broader process will stretch beyond 2015, given the complexity of the reengineering challenge involved as well as the contention of this effort with other near-term changes that are required for other purposes”.
Finally, the New York Fed admitted in its statement that the risk of a fire sale of collateral by a dealer that is losing access to repo financing (pre-default), or by creditors of a dealer once it has defaulted (post-default), remain concerns.
“Substantial progress has been observed to date with respect to pre-default fire sales, due to capital and liquidity regulations that have prompted dealers to extend the tenor of their financing for less liquid asset,” the New York Fed was keen to stress.
“But as yet, no mechanism exists to address the challenge of coordinating sales of collateral by the creditors of a defaulted dealer in an orderly manner.”
The New York Fed provided an update on the implementation of the now-disbanded Tri-party Repo Infrastructure Reform Task Force’s seven-point roadmap for reform on 24 June.
A key aspect of the reform roadmap, finalised in 2012, was to drastically reduce the share of triparty repo volume that is financed with intra-day credit from a clearing bank. BNY Mellon announced in early May that this had been achieved: the secured credit extended in the triparty repo market was reduced by $1.44 trillion, or 97 percent, resulting in the practical elimination of such credit in its programme.
Acknowledging this success, the New York Fed said in its statement: “As a result, the share of triparty repo volume that is financed with intra-day credit from a clearing bank has dropped markedly, from 100 percent as recently as 2012, to a level averaging 3 to 5 percent today (as compared with the task force’s original target of no more than 10 percent). Clearing banks, dealers and investors all made changes to their practices and processes that helped to achieve this goal.”
But the last point of the task force’s roadmap, the full alignment of GCF repo settlement with the new triparty settlement process, still needs to be completed.
“The settlement process for the majority of GCF repo trades that occur between dealers at the same clearing bank is largely aligned with the reform goals; minimal intra-day credit is used, and settlement occurs between 3:30pm and 5:15pm,” explained the New York Fed.
“However, the subset of GCF repo transactions that occur between dealers at different clearing banks are still unwound at 8:30am, and still require uncapped, discretionary extensions of intra-day credit by the clearing banks to settle. This is a potential source of market instability in periods of stress.”
“When triparty repo lenders reduce the provision of financing to a repo borrower, the borrower may seek to obtain funding in GCF repo, where trades are arranged anonymously by inter-dealer brokers. In a full-blown stress event, GCF repo usage, and the associated intra-day credit needed to settle that GCF repo activity, could balloon suddenly and significantly, to levels that a clearing bank is unwilling or unable to support through the provision of the necessary intra-day credit.”
The GCF task was supposed to be completed this year, but the New York Fed has admitted that “the work required to align settlement of these inter-bank GCF repo trades with the broader process will stretch beyond 2015, given the complexity of the reengineering challenge involved as well as the contention of this effort with other near-term changes that are required for other purposes”.
Finally, the New York Fed admitted in its statement that the risk of a fire sale of collateral by a dealer that is losing access to repo financing (pre-default), or by creditors of a dealer once it has defaulted (post-default), remain concerns.
“Substantial progress has been observed to date with respect to pre-default fire sales, due to capital and liquidity regulations that have prompted dealers to extend the tenor of their financing for less liquid asset,” the New York Fed was keen to stress.
“But as yet, no mechanism exists to address the challenge of coordinating sales of collateral by the creditors of a defaulted dealer in an orderly manner.”
NO FEE, NO RISK
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
