FICC is transforming the repo market

DTCC recently announced that the U.S. Securities and Exchange Commission (SEC) has approved the expansion of the Sponsored Service, a programme from DTCC’s Fixed Income Clearing Corporation (FICC) subsidiary. This expansion broadens the category of market participants who can participate as sponsors. It also changes how the programme can be used, with sponsors now able to let their clients trade with counterparties other than themselves, providing sponsored members with the same execution flexibility they have in the bi-lateral market today.

“The greatest benefit of allowing different types of firms to be sponsors is that FICC has now made it possible to bring a much larger percentage of the market into clearing while maintaining our robust risk management standards,” said Murray Pozmanter, DTCC Managing Director and Head of Clearing Agency Services. “This should create needed capacity for the market, while at the same time reducing systemic risk such as fire sales.”

We sat down with DTCC’s Jim Hraska, Managing Director and General Manager, FICC, to discuss the success of the Sponsored DVP Repo Service, the impact of expansion, and benefits for the industry.

Can you provide background on sponsored repo since it began in 2005, and since the first expansion in 2017?

FICC’s Sponsored Repo Programme began back in 2005 with its inaugural sponsor, State Street Bank & Trust Company, using the programme as a means to facilitate investment of cash by their Registered Investment Company (RIC) clients in a capital-efficient manner. In 2017, FICC expanded member participation, moving from just RICs to Qualified Institutional Buyers. This not only expanded the number of cash providers eligible for the programme, but opened the door for collateral providers as well.

Since that expansion, we have seen the addition of two new Sponsoring Banks and steady increases in volume. Volume at the end of 2018 was over $230 billion. The OFR’s Money Market monitor reported $137 billion being transacted with FICC in the Money Market space alone.

Who will now be able to participate under this latest expansion?

This latest expansion focuses on who can participate as a Sponsor. We are expanding beyond banks, to what we refer to as Category 2 Sponsor, which includes all full service netting members of FICC other than interdealer brokers (IDBs) who are acting in their capacity as brokers (since the latter are not subject to full loss mutualisation).

In addition to who can be a Sponsor, the expansion also will allow one other important change: Sponsors, at their discretion, will be able to allow their clients to trade with counterparties other than themselves.

What is the benefit of allowing different types of firms to be sponsors?

The greatest benefit of allowing different types of firms to be sponsors is that FICC has now made it possible to bring a much larger percentage of the market into clearing while maintaining our robust risk management standards. With increased participation, there will be increased capacity in the market – while at the same time, reducing systemic risk such as fire sales.

How will this new Sponsor Category maintain DTCC’s high risk management standards?

It is critically important that we still maintain high risk management standards. Even though all full-service netting members will be permitted to be Category 2 Sponsors, FICC will limit their sponsored activity through a cap, which will be based on the aggregate VAR exposure a firm presents vs the level of capital they maintain. To the extent that their VAR exposure exceeds their net capital, FICC will stop accepting additional sponsored activity until the VAR exposure is reduced or the capital is increased.

Why is it important to have greater buy-side participation in cleared repo?

In order to create a robust cleared market, you need to be able to provide access to as many participants as possible on both the long and short sides of the equation. Buy-side participation, therefore, is crucial because they are the true cash lenders and cash borrowers the market needs, and many have struggled over the years to get capacity due to constraints on dealers’ balance sheets. This expansion of the Sponsored Service should create needed capacity for the market while reducing systemic risk such as fire sales.