On Fed’s Rec, DTCC To Expand Central Clearing For Tri-Party Repos

Following a recommendation by the Fed, DTCC announced it will begin in 2Q 2009 to expand its central counterparty (CCP) clearing services and trade guarantee to include all the parties involved in U.S. government securities tri-party repurchase agreements (repos).

The risks, benefits and need for clearing tri-party repos were highlighted in Fed Chairman Ben Bernanke's speech to the Council on Foreign Relations in Washington, D.C., earlier this week.

Bernanke called for "enhancing the resilience of the triparty repurchase agreement (repo) market," and said the industry should consider "the costs and benefits of a central clearing system for this market, given the magnitude of exposures generated and the vital importance of the market to both dealers and investors."

In 2008, DTCC's Fixed Income Clearing Corporation (FICC) cleared and settled government securities trades valued at more than $1 quadrillion, including some $300 trillion in FICC's General Collateral Finance repo service, which is geared specifically to tri-party repo activity.

Repos are financial transactions generally used for short-term funding, and typically involve the sale of a U.S. government security for cash and the subsequent repurchase of the same a similar security. Hence the name "repurchase agreement" or repo, for short. In a tri-party arrangement, a third party functions as the agent for the transaction and hold the security as collateral.

"Our central clearing system for U.S. government securities has served dealers, inter-dealer brokers and the principal agent banks for more than two decades," said Murray Pozmanter, DTCC managing director, Fixed Income Clearance and Settlement Group.

"However, in order to extend the safeguards of clearing and risk management services to include all the parties in tri-party repo trades, we're seeking approval from the Securities and Exchange Commission (SEC) to expand our membership to include registered investment companies such as mutual funds and money market mutual funds, which are a prime source of the short-term funding used in the repo market.

"The value of risk mitigation and central counterparty protection, which was always obvious to our members, became very clear during the crisis to segments of the industry that are not members of FICC and didn't have the benefit of counterparty risk protection," Pozmanter said in a statement. "So we're essentially seeking to increase the size of our tent to allow more companies inside so that they can take advantage of the market-neutral clearing services we provide."

Melanie Rodier has worked as a print and broadcast journalist for over 10 years, covering business and finance, general news, and film trade news. Prior to joining Wall Street & Technology in April 2007, Melanie lived in Paris, where she worked for the International Herald ... View Full Bio