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FICC's new repo services prove popular with money market funds

First Published 26th September 2017

Higher rates encourage participation

Research by Bank of America Merrill Lynch (BAML) has found that since the Fixed Income Clearing Corporation (FICC) expanded its "Sponsored Delivery-Versus-Payment" (SDVP) repo service in May"a number of money [market] funds (MMFs) have signed up as sponsored members" and "Bank of New York Mellon has joined State Street as a sponsoring member". With LIBOR set to be replaced by a repo rate, the FICC's services are increasingly important.

For the MMFs, using the SDVP service has allowed them to lend at higher rates as they are now "able to access a wider range of lower-rated dealers demanding cash [particularly foreign banks] that they would likely not otherwise be able to face."

BAML expects "participation will grow over coming months through additional sponsored memberships and increasing size", which it notes is in part driven by regulation. The "supplemental leverage ratio" agreed under Basel III comes into effect as of January 2018 and will restrict the ability of broker dealers to directly provide repo to clients, hence the appeal of indirect provision through the SDVP service. MMFs have already expanded their activity to include "direct repo with insurers and endowments as well as increased activity with foreign dealers, particularly those in Europe and Japan that are only required to compute their leverage ratios on a month- or quarter-end basis (i.e., not daily average balance sheet levels as in the US)."

The bank notes that the effect on increased usage of the FICC services will likely be to lower general collateral (GC) rates and reduce the GC/tri-party spread.