Monday news roundup: repo settlement; variation margin at CCPs; the Open Ledger Project and more (Premium)

Its been a busy end of the year with corporate announcements and thought leadership coming out at a fast pace. Here’s a collection of articles we found important but haven’t had time to comment on extensively.

Risk Magazine wrote up a plan by major CCPs to see if variation margin can count as settlement for OTC derivatives clearers (“Swaps CCPs hope to slash capital via margin change“). “Four derivatives clearing houses are seeking legal opinions regarding whether the daily payment of variation margin can be treated as the settlement of a cleared swap contract, a step that could translate into big capital savings for bank members of central counterparties (CCPs).” Clearers would get a big benefit from this status: a daily settled contract has a better capital outcome for banks than a contract with a longer term. Its a smart move by the CCPs and one that could pay off handsomely in their expanded usage.

The New York Fed’s Reverse Repo Facility is operating smoothly for now but volumes are creeping up towards year end: on December 18 the program was at $143 billion paying 25 bps. On December 8 the program was just $75 billion paying 5 bps. Bloomberg repeated the Fed’s notification that it “removed the daily limit on aggregate borrowings through its overnight reverse repurchase facility, previously set at $300 billion, in a step designed to make sure the benchmark interest rate stays inside its new target range.” (“Fed Removes Reverse Repo Cap to Ensure Control Over Rates“.)

A group of major financial services companies, tech firms and the Linux Foundation have formed their own open-source consortium for building new distributed ledger systems, the Open Ledger Project (ie, blockchain). Wired Magazine reports that “Several major companies from across both the technology and financial industries—including IBM, Intel, and Cisco as well as the London Stock Exchange Group and big-name banks JP Morgan, Wells Fargo, and State Street—have joined forces to create an alternative to the blockchain, the global online ledger that underpins the bitcoin digital currency. Overseen by the not-for-profit Linux Foundation, this open source project aims to build blockchain-like technology that can bring a new level of automation and transparency to a wide range of services in the business world, including stock exchanges and other financial markets.” Digital Asset Holdings is part of the consortium and has contributed code along with IBM. (“Tech and Banking Giants Ditch Bitcoin for Their Own Blockchain“.) Reuters reported that R3 is in this mix too: “The initiative will also work with the blockchain consortium of banks run by financial technology firm R3, which on Thursday said it had added another 12 banks, including Santander and Nomura, and would soon include some of the world’s biggest fund managers.” (“Finance and tech heavyweights join forces as blockchain initiative grows“.)

The US SEC has proposed major legislation that would prohibit registered investment funds from excessive derivatives use, and would likely make CTAs and other highly leveraged entities stop selling registered funds altogether (“Use of Derivatives by Registered Investment Companies and Business Development Companies“). “Under the proposed rule, a fund would be required to comply with one of two alternative portfolio limitations designed to limit the amount of leverage the fund may obtain through derivatives and certain other transactions. A fund would also have to manage the risks associated with their derivatives transactions by segregating certain assets in an amount designed to enable the fund to meet its obligations, including under stressed conditions. A fund that engages in more than a limited amount of derivatives transactions or that uses complex derivatives would be required to establish a formalized derivatives risk management program.” And look out for the inevitable impact on repo and securities lending: “The proposed reforms would also address funds’ use of certain financial commitment transactions, such as reverse repurchase agreements and short sales, by requiring funds to segregate certain assets to cover their obligations under such transactions.”

The Wall Street Journal had reported earlier in December on the DTCC’s plans to raise $50 billion in commitments from dealers to shore up repo at the Fixed Income Clearing Corp (“Is $50 Billion the Price of Repo Safety?“). Dealers were split in their reactions: “‘To force a facility of that size on all dealers, banks and otherwise, could force some dealers to leave DTCC, reducing liquidity in the bond market,’ said James Tabacchi, president at South Street Securities LLC, an independent broker dealer and member of the DTCC unit.” On the other hand, “‘The proposed facility will certainly create additional costs, but we feel these are far outweighed by the broad benefits of maintaining a stable and robust repo clearinghouse and, by extension, a healthier repo market,’ said Joe Noto, a managing director in the treasury department at $25 billion hedge fund firm Citadel LLC, whose securities arm is a DTCC member.”

Risk Magazine wrote about repo CCPs for the buy-side last Friday in “The ideas on offer to calm buy-side repo fears“. We did our own deep dive on this topic back in June: “The Realities of Repo Clearing for the Buy-side.”

A busy end of the year indeed.

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