05 December 2017
Reporter: Zsuzsa Szabo

BIS: CCPs could reduce segmentation in repo pricing

Central clearing for repo trades could reduce market segmentation and lead to convergence in pricing, according to the Bank for International Settlements Quarterly Review.

The report centres on a recent rule change from the Depository Trust & Clearing Corporation (DTCC), approved by the US Securities and Exchange Commission in May, allowing DTCC subsidiary the Fixed Income Clearing Corporation (FICC) to expand the availability of clearing in the repo market for more institutional investors.

This change means money market funds (MMFs) can provide cash or securities in the delivery-versus-payment markets, through a dealer sponsor.

Some MMFs have already started clearing repo through the FICC, and at the end of October, centrally cleared repo amounted to $13 billion. Although, according to BIS, the volumes are relatively small, they have been growing.

Centrally cleared repo made up almost 6 percent of the total repo volumes of the three fund families that cleared repo through the FICC in October 2017.

According to BIS, the initial reaction of MMFs suggests that central clearing has the potential to reduce market segmentation. There are also signs of convergence of prices, with centrally cleared repo trades earning up to 12 basis points more than the triparty rate index.

Further, funds that cleared trades through FICC reduced their end-of-quarter take-up of the overnight reverse repo compared with their peer funds.

Because of the netting and risk-weighted asset benefits, among others, of CCP trading, volumes of reverse repo with the Fed stood at $21 billion, for CCP funds, for Q3 2017.

The BIS report speculated that, if the funds had increased their reverse repo with the Fed at the same rate as their peers, this figure would have been around $35 billion.

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