The DTCC’s Murray Pozmanter on letting the buy-side into GCF® repo (Premium Content)

We had the opportunity to speak with Murray Pozmanter, DTCC General Manager and head of all SIFMU (Systematically Important Financial Market Utilities) businesses, about the DTCC’s planned expansion of GCF® repo to include the buy-side. Pozmanter is directly responsible for this effort. The rationale of allowing in money funds is well understood: dealers need more financing capacity and a repo CCP is among the best ways to get there. The more complex issues are how to protect both counterparties and the FICC in case of a counterparty default.

According to Pozmanter, the DTCC has wanted to allow in ’40 Act funds for some time. “When we first proposed this in 2009, the tri-party structure with banks extending intraday credit was not acceptable for FICC or for regulators. If FICC were in the middle, that market structure would have caused FICC to be in the position of extending credit intraday to the dealers..” FICC is no longer in that position since the US tri-party market unwind/rewind has been moved to the end of the day.

Operationally, DTCC already has a structure for ’40 Act fund participation in the clearing house’s Mortgage-Backed Services division. As Pozmanter notes, “the DTCC is not coming in cold” for bringing money funds into GCF. The primary operational challenge at this point is fleshing out the right legal construct for the institutional tri-party mechanism to work for all parties.

Pozmanter says that the market benefits of bringing in ’40 Act funds are twofold. First, a bigger US repo CCP addresses fire-sale risk by bringing institutional assets into DTCC for liquidiation in the event of a dealer default. Second, credit intermediation by DTCC could make repo stickier; in the event of a looming credit crisis, dealers with bilateral relationships are much more likely to see funding dry up than dealers on a CCP platform.

While there may be arguments that the GCF repo suite of US Treasuries, Agencies and MBS excludes the asset classes that might be most subject to fire-sale risk, it is also true that the three GCF products make up the bulk of the US repo market. On credit intermediation, market participants and CCPs worldwide agree that CCP involvement in the repo market offers meaningful protections to dealers needing funding in case of a future credit squeeze.

The question of dealer benefits to the repo CCP are important, especially given that ’40 Act fund transactions will be as cash providers only. This will create a build-up of one-sided dealer transactions as cash borrowers. Pozmanter expects that while dealers may pay more margin to the DTCC for their one-sided book, they may also benefit from the CCP counterparty exposure. This will be especially true if, to follow Daniel Tarullo’s speech on liquidity regulation from November 20, 2014, dealers are mandated to hold extra capital for short-term repo to other financial institutions. A qualifying CCP may be exempt from this conversation.

For the buy-side, the DTCC has proposed an interesting twist to margin and mutualization. The idea is that the buy-side will not contribute to a default fund and would not be exposed to any mutualized risk. Rather, in case of a default, “if a fund is a limited purpose member for tri-party and if they were an original counterparty to an insolvent dealer, Fund A must enter into a five day repo with FICC to give FICC enough time to liquidate or restructure the initially insolvent dealer’s position,” says Pozmanter. The liquidity facility solves the problem for ’40 Act funds that legally can’t mutualize risk, but gives DTCC enough time to liquidate or resolve the initially defaulting dealer’s position. If there were a failure on the fund side, then DTCC would return the securities to the dealer and the cash to the trustee as the liquidator.

The next step for GCF® repo is broadening the pool of participants. Allowing in hedge funds is one option, as is setting up a sponsored access model for prime brokers. The problem with sponsored access, says Pozmanter, “is that the dealer could not take the balance sheet offset.” This defeats the purpose of the repo CCP to begin with. How more buy-side participants gain access remains to be worked out. Pozmanter does not expect to expand the pool of eligible asset classes any time soon.

The DTCC is not alone in exploring options for their repo CCP. When asked who the competition is, Pozmanter cited CME and LCH.Clearnet. The Canadian Derivatives Clearing Corporation already has a repo CCP in the same time zone as well.

Pozmanter expects that realistically DTCC will accept ’40 Act funds into GCF® repo by the end of the first half of 2015.

Related Posts

Previous Post
Fed Reverse Repo Facility moves to 10 bps
Next Post
Bank of England primer on bank funding costs

Fill out this field
Fill out this field
Please enter a valid email address.


Reset password

Create an account