The Office of Financial Research (OFR) proposed a rule to improve transparency in the US repurchase agreement market. The rule includes collecting daily transaction level data from certain financial companies on their non-centrally cleared bilateral repurchase agreement trades. The OFR estimates approximately 40 entities, including primary and nonprimary dealers, and bank- and nonbank-affiliated dealers, will be covered by the rule if adopted.
After extensive discussions with market participants and consultations with the the Financial Stability Oversight Council (FSOC) as well as a pilot data collection initiative, the OFR chose to move forward with a permanent data collection.
Specifically, the OFR proposed that:
- firms submit daily trade and collateral information on all outstanding non-centrally cleared bilateral repurchase agreement transactions; and
- covered firms submit 33 data elements each day for all transactions, such as haircut, rate, and optionality.
“This initiative to provide better visibility into this opaque financial market segment is vital to helping ensure financial stability. When significant stress on US Treasuries spilled into the repo market in March 2020, regulators didn’t have full insight into the segment of the repo market where participants were most active, namely the non-centrally cleared bilateral segment. This was due, in part, to the lack of data reported to officials on these transactions,” said James Martin, OFR’s Deputy Director of Operations, in a statement. “The OFR is proposing to fill this data gap and provide regulators with more insight into Treasury market functioning, by requiring the largest institutions in the repo market to submit data on their non-centrally cleared bilateral transactions to the OFR each day.”
Repurchase agreements are critical to the US financial system’s securities and money markets. High-quality data are essential to assess and monitor risks in these markets, but historically little data has been available to regulators on bilateral repo activities. The OFR closed part of this data gap in 2019 by beginning to collect data on centrally cleared transactions and has now turned its attention to the non-centrally cleared bilateral repo market.
This segment of the repo market – where repo transactions are conducted between two firms without a central counterparty or triparty custodian – is a blind spot for regulators and is also the largest of the four repo market segments. FSOC, among others, recommended that the OFR consider ways to obtain better data on the non-centrally cleared bilateral repurchase agreement market, an important source of leverage for hedge funds.