Murray Pozmanter, DTCC
The Depository Trust & Clearing Corporation (DTCC), the post-trade market infrastructure for the financial services industry, has announced that the Securities and Exchange Commission (SEC) has approved rule changes allowing its Fixed Income Clearing Corporation (FICC) subsidiary to expand the availability of central clearing in the repo market. The rule approvals will allow institutional investors to participate in FICC either directly in the new Centrally Cleared Institutional Triparty (CCIT) Service or indirectly through a sponsoring member bank.
- CCIT Service - FICC is the only central counterparty (CCP) platform in the U.S. that clears tri-party repo and debt transactions. Since 1998, FICC's GCF Repo Service has enabled its dealer members to trade FICC-cleared general collateral tri-party repos with each other based on rate, term and underlying product throughout the day without requiring intra-day, trade-for-trade settlement on a Delivery-versus-Payment (DVP) basis. As an expansion of the GCF Repo Service, the CCIT Service will extend FICC's CCP services and guaranty of the completion of eligible trades to tri-party repo transactions between its dealer members and eligible tri-party cash lenders.
- Sponsored DVP Repo Service - Since 2005, FICC has also offered a service that allows well-capitalized bank members to sponsor their Registered Investment Company clients into FICC. With the expansion of the sponsored membership program, FICC will now permit additional Qualified Institutional Buyer clients to lend cash and U.S. treasuries via their sponsoring member banks throughout the day.
Enabling new market participants to join FICC reduces counterparty risk, a key benefit because of the guaranteed completion of settlement in the event of a member default. In such a stress scenario, the CCP guaranty can lower the risk of liquidity drain from a large scale exit by institutional investors. A centralized liquidation of a failed counterparty by FICC would reduce the risk of fire sales that drive down asset prices and spread stress across the financial system.
Centrally clearing these transactions at FICC also offers members opportunities for potential balance sheet netting and capital relief, which, in turn, may afford institutional investors increased lending capacity and income.
"The repo market is a critical source of funding for broker-dealers and an important cash management tool for institutional counterparties. We believe the larger group of market participants able to use central clearing through the CCIT Service and sponsored membership program strengthens the entire marketplace," said Murray Pozmanter, DTCC Managing Director and Head of Clearing Agency Services. "We applaud the SEC actions, and look forward to delivering increased central clearing capabilities to our expanded community."