MARKET INFRASTRUCTURE

DTCC processes first buy-side cleared repo collateral exchange

DTCC aims to bring new players into providing collateral and liquidity to the repo market.

By Joe Parsons joe.parsons@globalcustodian.com January 30, 2018 4:45 PM GMT

Capula Investment Management has become the first asset manager to provide collateral for cleared repo through the DTCC’s fixed income clearing house, as it looks to boost liquidity in the market via new participants.

Through the Sponsored DVP Repo Service, operated by the Fixed Income Clearing Corporation (FICC), the DTCC aims to bring the buy-side into providing collateral and liquidity to the repo market which has traditionally been represented by banks and broker-dealers.

“Today, with the addition of institutional participation as collateral providers, we have achieved our goal of providing a true cleared repo solution for the buy-side, lowering risk in the market,” said Murray Pozmanter, head of clearing agency services, DTCC.

“As more firms take advantage of the new repo clearing solution, fire-sale risk and price degradation are reduced as result of centralised liquidation services.”

A collateral provider for a repo trade involves one side providing securities as collateral and in turn borrowing cash.  With State Street acting as the sponsoring bank for Capula, it marks the first time in clearing that a buy-side client was able to borrow cash and provide collateral.

“Through the sponsored service, our non-’40 Act clients will now benefit from the capacity and counterparty strength associated with a centrally cleared platform,” added Gino Timperio, senior vice president and head of funding and collateral transformation, State Street.

DTCC stated that FICC is now actively onboarding other new sponsors and buy-side clients into the Sponsored DVP Repo Service.

Last year, the DTCC processed the first cleared repo trade between Morgan Stanley and hedge fund giant Citadel.

Central counterparty clearing houses (CCPs) are keen to bring asset managers and pension funds into the clearing process, as banks continue to withdraw from the space due to increased capital pressures on the business.

The move follows that of LCH, which launched its buy-side repo clearing service in September last year, with UK asset manager Insight Investment being the first to clear on behalf of a pension fund client. Frankfurt-based Eurex Clearing also onboarded Dutch pension fund giant PGGM as a clearing member for its securities lending clearing house. 

*Editors note: the story was amended to show Capula acted as the first collateral provider for cleared repo. The first buy-side cleared repo trade was executed last year.*