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DTCC proposes central clearing from USD1.6trn institutional tri-party repo market

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The Depository Trust and Clearing Corporation’s (DTCC) subsidiary Fixed Income Clearing Corporation (FICC) intends to submit a rule filing with the Securities Exchange Commission (SEC) and an Advance Notice filing to both the SEC and the Federal Reserve to provide central clearing for the over USD1.6 trillion institutional tri-party repo market.

Central clearing would play a key role in providing stronger participant and systemic safeguards for the tri-party repo market. FICC provides the only central clearing function for tri-party repo trades in the US and is the only platform ready to serve this market.
 
The intended rule filing will outline FICC’s proposal to leverage its existing risk management and trade guarantee services for the institutional tri-party repo market in the US Implementing FICC’s central counterparty (CCP) services for these transactions would increase operational efficiencies, guarantee completion of eligible trades, and lower the risk of a liquidity drain in the event of a dealer failure by extending its netting services.
 
“Centralising the clearing and settlement of repo transactions through FICC could potentially help to prevent another squeeze in tri-party funding such as the one observed in 2008 when Funds sharply reduced their lending during the run up to the Lehman failure,” says Murray Pozmanter, DTCC managing director and head of clearing agency services.  “It would also provide regulators with a broader and more comprehensive view of the repo market for the monitoring and management of systemic risk as well as mitigate risks associated with a fire-sale in the tri-party marketplace.”
 
The intended rule filing remains subject to regulatory review and approval by the SEC and the Federal Reserve Board in all respects.
 
Subject to regulatory review, the proposed service would allow the submission of institutional tri-party repo transactions between existing members of FICC’s Government Securities Division (GSD) and investment companies registered under the Investment Company Act of 1940 (referred to as “RICs” or the “buy-side”) where the RICs are the cash lenders in the transactions.  A new limited GSD membership type would be created for tri-party money lenders.  This membership type would be separate from full GSD service membership and would relieve RICs of being subject to full GSD membership requirements.
 
The proposed service would include general collateral financing (GCF Repo) eligible collateral, or approximately 74 per cent of the over USD1.6 trillion tri-party repo market. 

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