A long road of reform ahead for US triparty
10 December 2015 London
Image: Shutterstock
US triparty reform is just the first step in the evolution of wholesale funding markets, according to new joint BNY Mellon and PwC report.
The Future of Wholesale Funding Markets: A Focus on Repo Markets Post US Tri-Party Reform report found that, while regulation and ongoing reform will continue to shape wholesale funding, strong market forces combined with the underlying structure and profitability of the business are set to affect repo volumes, participant interactions and views of risks in the system.
Market participants must recalibrate business and operational models if they are to accommodate and benefit from fundamental changes within wholesale funding markets, according to the report.
Three-quarters of surveyed participants agreed that the wholesale funding markets are less vulnerable to a future crisis following the triparty reform initiative, which reduced the need for secured intra-day credit.
Reforms were also believed to have improved trading transparency and decreased operational risk through process improvements, such as automated three-way deal matching.
Three key drivers will shape the US market in the future, according to BNY Mellon and PWC’s report.
Pending regulations on repo users will likely dampen repo volumes in the near term, most directly through the allocation of capital and liquidity ratios to the desk level.
Meanwhile, the increased demand for high-quality liquid assets (HQLA) and a potential further increase brought about by money market reform, indicate that the Federal Reserve will likely maintain its reverse repurchase facility (RRP) for the foreseeable future.
Finally, expanding cleared repo services in the US is now considered an imperative, given the need to address ‘fire sale’ risk and global systemically important banks’ (G-SIB) search for balance sheet relief.
“This complex array of priorities increases the importance of a comprehensive collateral roadmap to guide firm strategy through interactions with market participants,” said Brian Ruane, CEO of broker-dealer services and triparty services at BNY Mellon.
“The change we see coming to the wholesale funding markets and broader financial industry is profound. Institutions must review their current position, understand the industry, revise business and operating models, and organise their collateral capabilities around this changing environment.”
To date, the Federal Reserve has provided HQLA assets to support cash investing needs through its RRP facility.
“The RRP is now amongst one of the most important participants in triparty repo, an effective monetary policy tool and a buffer to market anomalies,” says Ruane.
“While certain market developments, such as increasing G-SIB repo volumes following the expansion of cleared repo, may provide the Fed with an easy exit from the RRP, there was near unanimity across the firms we interviewed that conditions will demand its prolonged existence.”
The Future of Wholesale Funding Markets: A Focus on Repo Markets Post US Tri-Party Reform report found that, while regulation and ongoing reform will continue to shape wholesale funding, strong market forces combined with the underlying structure and profitability of the business are set to affect repo volumes, participant interactions and views of risks in the system.
Market participants must recalibrate business and operational models if they are to accommodate and benefit from fundamental changes within wholesale funding markets, according to the report.
Three-quarters of surveyed participants agreed that the wholesale funding markets are less vulnerable to a future crisis following the triparty reform initiative, which reduced the need for secured intra-day credit.
Reforms were also believed to have improved trading transparency and decreased operational risk through process improvements, such as automated three-way deal matching.
Three key drivers will shape the US market in the future, according to BNY Mellon and PWC’s report.
Pending regulations on repo users will likely dampen repo volumes in the near term, most directly through the allocation of capital and liquidity ratios to the desk level.
Meanwhile, the increased demand for high-quality liquid assets (HQLA) and a potential further increase brought about by money market reform, indicate that the Federal Reserve will likely maintain its reverse repurchase facility (RRP) for the foreseeable future.
Finally, expanding cleared repo services in the US is now considered an imperative, given the need to address ‘fire sale’ risk and global systemically important banks’ (G-SIB) search for balance sheet relief.
“This complex array of priorities increases the importance of a comprehensive collateral roadmap to guide firm strategy through interactions with market participants,” said Brian Ruane, CEO of broker-dealer services and triparty services at BNY Mellon.
“The change we see coming to the wholesale funding markets and broader financial industry is profound. Institutions must review their current position, understand the industry, revise business and operating models, and organise their collateral capabilities around this changing environment.”
To date, the Federal Reserve has provided HQLA assets to support cash investing needs through its RRP facility.
“The RRP is now amongst one of the most important participants in triparty repo, an effective monetary policy tool and a buffer to market anomalies,” says Ruane.
“While certain market developments, such as increasing G-SIB repo volumes following the expansion of cleared repo, may provide the Fed with an easy exit from the RRP, there was near unanimity across the firms we interviewed that conditions will demand its prolonged existence.”
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