Why Is So Much Repo Not Centrally Cleared?
Lessons from a Pilot Survey of Non-centrally Cleared Repo Data
by Samuel J. Hempel, R. Jay Kahn, Robert Mann, and Mark E. Paddrik
The Office of Financial Research (OFR) conducted a pilot collection of data on non-centrally cleared bilateral repurchase agreement (NCCBR) trades spanning nine dealers over three reporting dates in June 2022. Using data from this pilot collection, we document basic facts about volumes, rates, counterparty types, collateral, and haircuts in this relatively opaque segment of the repurchase (repo) market. We find that on three dimensions—rates, counterparty types, and collateral—pilot participants’ activity in the NCCBR segment roughly mirrors their activity in the centrally cleared bilateral segment, the DVP Repo Service of the Fixed Income Clearing Corporation (FICC). However, we find that haircuts in NCCBR materially differ from those in tri-party repo, with over 70% of Treasury repo in NCCBR transacted with zero haircut. Our findings suggest that differences in haircut, margining, and netting are primary factors that drive dealers’ use of NCCBR over other segments of the repo market.
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When dealers are borrowing from a customer, they demand relatively more collateral be delivered than when they lend to the same customer. In fact, haircuts on Treasury repo where dealers are borrowing from hedge fund customers are usually negative or zero, while haircuts where dealers are lending to hedge funds are usually zero or positive. This may reflect the relative credit risk of dealers and hedge funds. The data we show here suggests that protection against the counterparty may play a larger role in the magnitude and sign of haircuts in NCCBR than in other markets like tri-party repo, where, for instance, haircuts on Treasury transactions are almost universally 2% and have been for several years.
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We estimate that 70% of hedge fund repo borrowing and 57% of hedge fund repo lending at zero haircut are netted, suggesting that among these trades, netted packages play a large role in
driving zero haircuts.
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Going forward, the OFR plans to follow its pilot collection with a permanent collection of data from this segment of the market.
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The full paper is available at https://www.financialresearch.gov/briefs/2023/05/12/why-is-so-much-repo-not-centrally-cleared