DTCC Adopts Tri-Party Repos In Clearing Service

The Depository Trust & Clearing Corporation (DTCC) will begin in 2Q 2009 to expand its central counterparty (CCP) clearing services and trade guarantee to include all the parties involved in U.S. government securities tri party repurchase agreements (repos). DTCC's Fixed

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The Depository Trust & Clearing Corporation (DTCC) will begin in 2Q 2009 to expand its central counterparty (CCP) clearing services and trade guarantee to include all the parties involved in U.S. government securities tri-party repurchase agreements (repos).

DTCC’s Fixed Income Clearing Corporation (FICC) subsidiary is the provider of trade comparison, netting, risk management and settlement for the U.S. government securities marketplace. In 2008, FICC cleared and settled government securities trades valued at more than $1 quadrillion, including some $300 trillion in FICC’s General Collateral Finance repo service, which is geared specifically to tri-party repo activity.

As new members, mutual funds will be able to take advantage of FICC’s risk management process, which includes daily portfolio monitoring, intra-day collateral requirements and FICC’s guarantee as a central counterparty that a government securities trade will be completed on its original terms even if one of the parties to the trade defaults.

As part of its SEC filing, FICC said it would require mutual funds seeking membership to have $100 million in net asset value.

“Our central clearing system for U.S. government securities has served dealers, inter-dealer brokers and the principal agent banks for more than two decades,” says Murray Pozmanter, managing director, Fixed Income Clearance and Settlement Group, DTCC.

“However, in order to extend the safeguards of clearing and risk management services to include all the parties in tri-party repo trades, we’re seeking approval from the Securities and Exchange Commission (SEC) to expand our membership to include registered investment companies such as mutual funds and money market mutual funds, which are e a prime source of the short-term funding used in the repo market.”

“As soon as we receive SEC approval,” continues Pozmanter “We can begin to work with the funds to expedite their connecting to our clearing system, bringing increased transparency, risk mitigation and efficiency to this market, and creating the kind of system the Federal Reserve would like to see.”

“The value of risk mitigation and central counterparty protection, which was always obvious to our members, became very clear during the crisis to segments of the industry that are not members of FICC and didn’t have the benefit of counterparty risk protection.

“So we’re essentially seeking to increase the size of our tent to allow more companies inside so that they can take advantage of the market-neutral clearing services we provide.”

L.D.

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