10 March 2017
London
Reporter: Drew Nicol

OFR: CCP offers route to cheaper repo


Repo traders can reduce transaction costs by using central counterparties (CCP), according to the Office of Financial Research (OFR).

In a recent research note, the OFR noted: “CCPs for dealer to-non-dealer repos may be attractive to dealers if netting results in smaller balance sheets and cost savings. On the other hand, central clearing would concentrate risk in CCPs themselves.”

The OFR analysed data from its 2015 bilateral repo data collection pilot with input from the Securities and Exchange Commission.

Using a CCP cuts down on credit risk exposures but adds additional margin costs.

The OFR estimates that extending US treasuries repo CCP services to non-dealer counterparties would result in a reduction of up to 81 percent of risk exposures for dealers. This exceeds the 63 percent reduction from bilateral netting alone.

However, this expansion of CCP repo for non-dealers increases the risk exposure for the CCP by as much as 75 percent.

The pilot used data from eight bank holding companies that voluntarily provided snapshots of their trading books on three reporting days in 2015: 12 January, 10 February and 10 March.

In conclusion to its research, the OFR stated: “Whether the potential benefits outweigh the costs depends on the cost of bilateral repo activity relative to the cost of raising additional funds to guarantee centrally cleared transactions. Several caveats apply to our analysis.”

“We focus narrowly on direct economic benefits to market participants and increased exposures to the CCP.”

“We do not consider other potential benefits, such as the increased transparency associated with transactions executed through central counterparties. Our findings are based on data collected from a limited number of dealers in a data collection pilot in 2015.”

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