DTCC Agency Seeks Tri-Party Repo Clearing Mandate

The Fixed income Clearing Corporation (FICC), a subsidiary of the Depository Trust and Clearing Corporation (DTCC), is proposing a clearing mandate for the $1.6 trillion tri-party repo market.

Murray Pozmanter, head of clearing agency services, managing director, DTCC, says that FICC is preparing the draft filing for the rule change and is engaged in ongoing conversations with regulators. During the first quarter of 2015, he adds, FICC expects to formally submit the filing to the U.S. Securities Exchange Commission (SEC) to bring in the mandate.

The proposal comes days after the repo market came under fire from US regulators, claiming large financial institutions offload their assets in exchange for trillions of dollars’ worth of short-term financing.

“Centralizing the clearing and settlement of repo transactions through FICC could potentially help to prevent another squeeze in tri-party funding such as the one observed in 2008 when Funds sharply reduced their lending during the run up to the Lehman failure,” says Pozmanter.

Clearing of tri-party repo trades is intended to make the market safer by ensuring orderly liquidation of positions in the event of a bank or fund going default.

Currently J.P. Morgan and BNY Mellon serve as the industry’s clearing banks for tri-party repos. However the DTCC’s bond clearinghouse wants to grant limited clearing membership to large funds and investment managers to prevent a “fire sale” of the collateral that secures tri-party repo loans.

If the proposal is approved by U.S. regulators, around 74% of the daily tri-party repo activity will be cleared through the FICC clearing house, the DTCC says.