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DTCC plans to expand centrally cleared tri-party repo services available to non-broker dealers

First Published 28th March 2017

The Depository Trust & Clearing Corporation's (DTCC) Fixed Income Clearing Corporation (FICC) subsidiary plans to expand its range of centrally cleared tri-party repo services available to non-broker dealers, beginning in the second quarter of 2017.

The FICC has proposed two changes to the SEC, which will be subject to a comment period of 45-90 days before a vote on regulatory approval. Both changes relate solely to GC (general collateral) repo, which encompasses US Treasury and Agency securities.

The first proposed change is a new "Centrally Cleared Institutional Tri-party" (CCIT) service. This would allow tri-party repo lenders - but not borrowers - to directly access the FICC's central clearing of tri-party repo. CCIT would be available to Money Market Funds (MMFs), an important class of market participant which provides the bulk of short-term funding to broker-dealers (BDs).

The second proposed change is to the existing "Sponsored Delivery-Versus-Payment" (SDVP) service. At present, this allows "Registered Investment Companies" to be sponsored by a "well-capitalized" member bank in order to indirectly access tri-party repo on the FICC's platform. The DTCC plans to expand the SDVP service to all "Qualified Institutional Buyers" (QIBs) for both lending and borrowing. Note that QIBs means only unlevered funds such as MMFs, insurers, pensions funds or SWFs (sovereign wealth funds) and so will not include hedge funds. Those will have to continue to access repo via uncleared, bilateral repo or other forms of securities lending.

The changes proposed by the DTCC are likely to have a number of effects. They would reduce the fragmentation in the repo market which would lead to some convergence of repo rates. Perhaps more importantly, by reducing pressure on broker-dealer balance sheets by netting transactions, the changes should increase BDs' ability to lend. At present, BD exposure to repos is calculated on a gross basis, the result of the Supplementary Leverage Ratio (SLR) calculation in the Basel III reforms that were implemented after the financial crisis of 2008.