New York Fed Sees Delay in GCF Repo Rules

The Federal Reserve Bank of New York has said rules to prevent systemic risk in the repo markets will likely stretch beyond 2015.

In an announcement issued last week, plans to align the settlement process for General Collateral Finance (GCF) repo will not be completed this year, as previously hoped in its February 2014 statement.

Currently, GCF repo transactions between dealers at different clearing houses are unwound a 8.30am, and still require uncapped, discretionary extensions of intraday credit by the clearing banks to settle.

This could mean during times of financial turmoil, intraday credit needed to settle GCF repo activity could balloon suddenly and significantly to levels that a clearing bank is unable or unwilling to support.

The New York Fed hopes to align this with the new triparty repo settlement process, which takes place between 3:30pm and 5:15pm.

However according to the statement, clearing banks and the Fixed Income Clearing Corporation (FICC), a repo clearing house, have been unable to align settlement of interbank GCF repo trades, “given the complexity of the reengineering challenge involved as well as the contention of this effort with other near-term changes that are required for other purposes.”

In the U.S., J.P. Morgan and BNY Mellon serve as the industry’s clearing banks for triparty repo.

The New York Fed also acknowledged the risk posed by fire sales, or forced selling of securities used as collateral in the case of a large default.

The FICC, which is owned by the Depository Trust & Clearing Corporation (DTCC), is pushing for a central clearing mandate for repo, which would establish an orderly process for the winding down of bank and prevent fire sales.