Finadium held its second annual repo/secured funding event in New York on Wednesday, June 4, sponsored by SunGard, Euroclear and OCC. We’ve gotten great feedback so far; the biggest criticism was that we ran out of time for all of the things we wanted to discuss. This article provides a recap of the event for Finadium clients.
The dominant theme of the event was innovation: market participants and service providers are working on new products, new legal agreements and new ways of doing business. Some but not all of these options lead to CCPs. The one unifying theme of these innovations is that they must draw in a critical mass of market participants to achieve success. This is no small task. Some of the leading contenders for new product launches including AQS’s equity repo platform and NASDAQ OMX’s new Single Treasury Futures product are well into this process. Others including Collateralized Commercial Paper are still milling about with no one strong unifying argument behind them.
For the first time, the OCC was able to speak publicly about their plans for equity repo clearing. We had a good discussion about the value of this service, and an attendee pointed out afterwards the important overlap between equity securities lending and equity repo. US equity tri-party repo is currently US$132.7 billion, but equity securities lending is 2X to 3X times that. If equity repo clearing can get going in earnest, it may see additional traction from the equity securities lending market. The OCC also talked about letting in beneficial owners as direct participants under certain conditions (what we’ll call “the Eurex maneuver”) and the risk mechanics of clearing.
While the panelists agreed that an equity repo CCP would be a step forward in US fire-sale risk management, the fact is that there is only one US entity big enough to buy securities in a time of crisis and hold them until the crisis passes, then selling into a more orderly market. This is the Federal Reserve, and the Maiden Lane LLC is the precursor to what a new buyer of last resort might look like. Of course, the Fed wants nothing to do with this, leading to an ongoing open question about liquidations for any less liquid repo collateral in the event of a major default.
We discussed Single Treasury Futures (STFs); will this product save the market or be one of many ideas that have come and gone. The panelists all thought that if any product had a good chance of success, STFs were it. Moving short term repo liquidity onto a CCP in a synthetic transaction is an ideal solution for hedge funds and other clients that need funding but don’t have the clout or the cash to pay for that funding once new regs substantially raise the capital cost of repo transactions (which, both we and an attendee agreed were in the 60-70 bps range once a firm has used up all of its available balance sheet).
Other big topics were the expected activities of the DTCC/Euroclear JV, the role of capital allocations at banks (the “capital police”), and whether collateral funding should be centralized in repo, treasury, securities lending or somewhere else. It’s true that we ran out of time before getting to everything we wanted to discuss, including the use of IT on repo desks and limits on rehypothecation. But we benefitted greatly from well-informed panelists and attendees who were willing to speak their piece.
Our thanks to our sponsors and attendees for making our second annual repo/secured lending event a great success.