The U.S. Options Clearing Corporation (OCC) is planning to implement a new program that will enable it to carry out repurchase agreements (repos) and securities lending to non-bank firms such as pension funds and insurance companies, according to a regulatory filing.
The program, called the “Master Repurchase Agreement”, was filed to the U.S. Securities Exchange Commission (SEC) last November, and on January 2, 2015, the Commission has authorized the OCC to implement its proposal.
The changes is part of the OCC’s “overall liquidity plan that is meant to provide OCC with access to diverse sources of liquidity, which includes committed credit facilities, securities lending and securities repurchase agreements”, in order to meet its settlement obligations, according to the filing.
Furthermore, the OCC will only enter into repos with “non-bank institutional investors, such as pension funds and insurance companies that are not OCC clearing members,” as it looks to attract interest from a wider range of firms that maybe willing to be counterparties to the OCC.
Under the proposal, as the seller of the master repo, the OCC will transfer eligible U.S. government securities to the buyer in exchange for a payment. The buyer will simultaneously agree to transfer the purchased securities back to the OCC at a specified date or on the OCC’s demand.
However the buyer of the master repo will not be able to ‘rehypothecate’ the loaned securities, which means the buyer would not be able to use the securities as collateral to another trade with a third party. This is because: “The OCC believes that the prohibition on rehypothecation also would reduce the risk that a third party could interfere with the buyer’s transfer of the purchased securities on the repurchase date.”
The move from the U.S clearer is the latest as central counterparties (CCPs) are increasing their participation in securities lending markets.
Last year Frankfurt-based Eurex Clearing saw the addition of Morgan Stanley as a member of its securities lending CCP. Eurex also reported a number of records in its repo and secured money markets.
In addition, the OCC is looking to develop a methodology for agent lending institutions to be securities lending related clearing participants.
Despite the move, further involvement by clearing houses in the securities lending market has raised a few eyebrows. There has been a lot of reluctance to move securities lending onto an electronic platform, much less a CCP, and pushing securities lending onto a CCP could be seen as a complicating factor because it is traditionally a bilateral and very relationship-based business.
OCC To Expand Securities Lending To Buy-Side Firms
The U.S. Options Clearing Corporation (OCC) is planning to implement a new program that will enable it to carry out repurchase agreements (repos) and securities lending to non-bank firms such as pension funds and insurance companies, according to a regulatory filing.