The securities finance CCP premium – an example from the US repo market (Premium Content)

Transactional data from late October 2014 show clearly the benefit of CCPs to dealers in the securities lending and repo markets. We have been saying for a while that we expected a two-tiered pricing market to develop as dealers preference the netting and risk-weight advantages of CCPs over their equivalent bilateral transactions. October spelled out the pricing difference in no uncertain terms for this end-of-month observation period.

Data from DTCC’s FICC GCF repo transactions between dealers, and benefitting from netting, show that GCF Treasury repo went from 6.8 bps on Oct 1 2014 to 19.8 bps on Oct 31 2014 before falling again to 12 bps by Nov 4 2014 (see chart). The high point on Oct 31 2014 was reported at 22 bps.

Data from the Fed’s Reverse Repo Facility showed the Fed’s artificial floor at 3-5 bps. Volumes rose sharply at year end but did not approach the max in either dollar amounts or number of participants submitting bids.

Most importantly, data on GC repo in tri-party was priced below the Fed’s floor, at times negative or simply unavailable.

This answers the question, what’s the pricing benefit of a dealer-only CCP in a balance sheet sensitive environment? If Treasury or Agency overnight repo is going at 0 bps in tri-party repo, then the CCP benefit is 19.8 bps. If tri-party HQLA repo is simply unavailable otherwise then the CCP is priceless.

It will be important see how CCP-cleared repo equivalents behave when the number of market participants can increase substantially, and how repo CCPs price when the buy-side is allowed in as cash providers. We expect similar pricing dynamics to shape up on securities lending CCPs as agent lenders and beneficial owners become direct participants.

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