Complimentary to its work on clearing and settlement of purchases and sales of U.S. Treasuries in the secondary market, the TMPG in November 2020, tasked a working group with undertaking a review of post-trade processes for common securities financing transaction types for Treasuries – repurchase and securities lending agreements (collectively referred to as Secured Financing Transactions or SFTs). These financing transactions are critically important because they are a main source of secured funding and liquidity for fixed income securities. Despite their importance, the clearing and settlement processes for SFTs, and the inherent liquidity and credit risks may not be well understood across all market participants.
Developing a common understanding of these processes and related risks is important for all market participants. Although these post-trade processes usually work smoothly, in times of crisis they can be disrupted and result in additional stress to the marketplace. Given the importance of SFTs to the U.S. financial market, such a disruption would likely impact overall financial stability.
A number of illustrative clearing and settlement cases are presented using stylized maps. These maps have a similar structure to the clearing and settlement maps published in the TMPG’s White Paper on Clearing and Settlement in the Secondary Market for U.S. Treasury Securities. The main segments of each trade’s life cycle are included, from execution to clearing to the settlement of the on- and off-legs.
In addition to illustrating the clearing and settlement processes, the maps also highlight the participants in the settlement chain and which of them hold counterparty credit risk, liquidity risk, and credit extension risk throughout the clearing process.
The Trade Flow Mapping document is available at https://www.newyorkfed.org/medialibrary/Microsites/tmpg/files/CSP_SFT_Draft_Maps.pdf