Bilateral repo margins are too low, say Gary Gensler and Nellie Liang at the Fed’s 2022 US Treasury conference

“The Beatles and the Treasury Market”: Remarks Before the U.S. Treasury Market Conference
Gary Gensler, Chair, US Securities and Exchange Commission

Reduced clearing increases system-wide risk. Currently, IDBs often are bringing just one side of the trade into central clearing if the counterparty is not also a member of the clearinghouse. Broadly speaking, our proposal would require clearinghouses to ensure that their members bring in all of their repurchase agreement (repo) transactions, both legs of the transactions for IDB trades, and certain additional cash transactions.

Repos, the funding instrument for much of the debt markets, were at the center of the jitters in the Treasury market in 2019. Moreover, in the last few years, many hedge funds are receiving the vast majority of their repo financing in the non-centrally cleared bilateral market, where haircuts or initial margin requirements are not necessarily applied. For repo transactions, the scope of the proposal is broader than proposed in the cash market and would cover any repo transactions entered into by a clearinghouse member.

The first reform would strengthen the Commission’s rules for clearinghouses transacting trades in Treasuries, particularly with regard to gross and net margining. Under such rules, members of a clearinghouse would no longer be able to net their customers’ activity against house activity when determining margin.

Remarks by Under Secretary for Domestic Finance Nellie Liang at the 2022 Treasury Market Conference

Almost 75 percent of repo transactions collateralized by Treasury securities and about 25 percent of repo transactions collateralized by non-Treasury securities are traded at a zero percent haircut. In certain cases, these haircuts may represent netted packages, where dealers enter into offsetting repo and reverse-repo trades with their counterparties, but it will be important to assess how these practices affect risks.

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