OFR on Lack of Centrally Cleared Repo
The U.S. Department of the Treasury's Office of Financial Research (OFR) posted a paper which asks, "Why Is So Much Repo Not Centrally Cleared?" Its summary says, "The Office of Financial Research (OFR) conducted a pilot collection of data on non-centrally cleared bilateral repurchase agreement (NCCBR) trades spanning nine dealers over three reporting dates in June 2022. Using data from this pilot collection, we document basic facts about volumes, rates, counterparty types, collateral, and haircuts in this relatively opaque segment of the repurchase (repo) market. We find that on three dimensions -- rates, counterparty types, and collateral -- pilot participants' activity in the NCCBR segment roughly mirrors their activity in the centrally cleared bilateral segment, the DVP Repo Service of the Fixed Income Clearing Corporation (FICC). However, we find that haircuts in NCCBR materially differ from those in tri-party repo, with over 70% of Treasury repo in NCCBR transacted with zero haircut. Our findings suggest that differences in haircut, margining, and netting are primary factors that drive dealers' use of NCCBR over other segments of the repo market." The full study explains, "The repurchase agreement (repo) market is an integral component of the U.S. financial system, providing trillions of dollars of funding every day and facilitating trading in U.S. Treasuries and other securities. The repo market allows participants to borrow cash against securities pledged as collateral, with an obligation to repurchase those securities in the future. The U.S. repo market can be divided into four major segments, depending on two factors: (1) whether the trades are settled bilaterally or through a tri-party custodian and (2) whether the trades are centrally or non-centrally cleared through the Fixed Income Clearing Corporation (FICC). This brief focuses on NCCBR, which is the only segment of the market that contains neither a central counterparty nor a tri-party custodian." The Intro adds, "Despite the increased repo market transparency provided by transaction-level datasets, such as the OFR's Centrally Cleared Repo Data Collection and the Federal Reserve's collection of non-centrally cleared tri-party repo, regulators' understanding of NCCBR has been limited. Even the traders who conduct business in this market every day may have little direct visibility into the competitive landscape. This opacity persists despite the fact that the estimated size of primary-dealer activity in the NCCBR segment exceeds $2 trillion outstanding. This makes the NCCBR segment the largest of the four segments of the repo market in terms of gross repo exposure by primary dealers. This brief uses the OFR's pilot collection of NCCBR data to answer an obvious question raised by the trillions of dollars outstanding in NCCBR: why are volumes so high in this segment? Central clearing, as provided in the U.S. repo market by FICC, provides two main benefits to repo market participants: First, it can significantly reduce counterparty risk. Second, it allows a dealer to net their repo positions with one counterparty against reverse repo positions with another counterparty for the purpose of calculating certain regulatory ratios, thus reducing the balance sheet costs of participating in repo."
