Dealers Will Benefit from Increased Buy-Side Activity in Repo Clearing, Says Finadium

A new report from consultancy firm Finadium says increased participation from asset managers in repo clearing houses, or CCPs, will mean added netting benefits for dealers.

Buy-side firms are increasingly becoming direct members of repo CCPs, as they hope to benefit from a mutualised risk framework. Finadium expects these CCPs to become a substantial part of buy-side market activity over the next two years.

As buy-side participation grows, dealers will be able to benefit from netting through the CCP, in which it can offset positions and reduce its balance sheet exposures.

“By inviting buy-side firms to meet on a CCP, dealers should theoretically net down transactions and have lower counterparty risk weighted exposure charges,” says Josh Galper, managing principal for Finadium and author of the report.

“These two factors should in turn allow dealers to expand their capacity and do more repo business overall.”

In the U.S., the Depository Trust & Clearing Corporation is pushing through a clearing mandate for repo. If successful, it would see a huge migration of buy-side activity onto CCPs.

However, the challenge for buy-side firms is to understand what potential complications there are with repo clearing.

“There are operational considerations including how to move cash in an out of the right accounts and how to optimize tri-party service providers. There is also risk management on the CCP itself: how well is the CCP capitalized in the event of default; what happens if two or more clearing members default at once; or what happens in case of multiple CCPs experiencing large defaults at the same time?” says Galper.

“These are complex questions and some have no answer, but a move to CCP clearing for repo means that buy-side firms should have some grasp on the key issues before moving forward.”