OFR: CCPs could cut repo trading costs

Economic benefit of using CCPs for repo trades should be weighed against need for increased margin, says OFR.
By Hayley McDowell
Using central counterparties (CCPs) to clear repo transactions could significantly reduce costs, according to the Office for Financial Research (OFR).

A recent study carried out by OFR claims CCPs offer economic incentives to repo dealers by reducing risk exposures.

However, the benefit must be weighed against the cost of additional funds contributed to cushion the CCPs from exposure, it said.

“If CCPs centrally cleared and guaranteed trades, netting could result in lower credit exposures for dealers. Bank-affiliated dealers would potentially realise savings by reducing assets and corresponding liabilities on their balance sheets,” OFR explained.

An analysis within the study found extending US treasuries repo CCP services to non-dealer counterparties would see a reduction of up to 81% of risk exposures for dealers.

At the same time, expanding access to a repo CCP for non-dealers increases the risk exposure for the CCP by as much as 75%.

OFR concluded: “The existence of continued industry interest in expanding CCP services to a broader range of market participants suggests that strong economic incentives remain.

“Whether the potential benefits outweigh the costs depends on the cost of bilateral repo activity relative to the cost of raising additional funds to guarantee centrally cleared transactions.”