Summary: ISDA Webinar on the Use of DLT and Smart Contracts in Market Infrastructure for Derivatives Processing

Earlier today, the International Swaps and Derivatives Association (ISDA) sponsored a webinar, “The Foundations of an Efficient Market Infrastructure,” that focused on an initiative by ISDA’s Market Infrastructure and Technology Committee to facilitate the adoption of emerging technologies (DLT, smart contracts)into the trading, documentation and processing of derivatives.

The focus of the conference was on derivatives processing and reporting; however, the issues that plague derivatives are relevant to many other financial market processes and activities.  Specifically, the primary challenge with respect to derivatives – a strained infrastructure that is too costly and inefficient to be sustainable – is common throughout the financial markets.  Or, put  differently, the development of technological solutions within the derivatives sector has the potential to become a template for the resolution of similar issues in other sectors of the financial marketplace.  For this reason, today’s webinar may have an appeal that is broader than market participants with an interest in the process of derivatives.

The remainder of this message contains a summary of the information discussed at this informative webinar. Continue Reading

Tri-Party Repo Data: Summary for April 2017 to August 2017

The Federal Reserve Bank of New York (FRBNY) continues to track and release monthly statistics of the U.S. tri-party repo market.  This post concerns the April 2017 through August 2017 statistics (the “Five-Month Period”).

In March 2017, the FRBNY discontinued publishing the PDF and excel files containing single month statistics to which we have ordinarily provided a hyperlink.  Instead, tri-party repo statistics will only be available on a consolidated basis through the FRBNY’s tri-party repo interactive tool (available here) and master excel data file (current version here).  Continue Reading

A Look At the Quarter-End Repo Market

Recently the Liberty Street Economics blog on the Federal Reserve Bank of New York’s website published a post entitled: “Regulatory Incentives and Quarter-End Dynamics in the Repo Market.”  The post explores the quarter-end repo dynamics of the U.S. repo market for U.S. Treasury securities and primarily focuses on the impact that the leverage ratio has on quarter end dynamics.

Their evaluation of the U.S. tri-party repo market shows that European banks reduce their repo demand at quarter-end while little change is seen from banks in other jurisdictions, including Japan and the United States.   The post also shows that repo rates generally remain stable at quarter-end which they attribute to the Fed’s overnight reverse repo program soothing out the disruption in supply caused by the European banks by accepting cash that lenders cannot otherwise invest. Continue Reading

Fed Reserve Requests Comments on Proposed Repo Rates

On August 22, 2017 the Board of Governors of the Federal Reserve System (“Fed”) issued a notice and request for comment (the “Notice”) with respect to the proposed publication by the Federal Reserve Bank of New York (“FRBNY”) of three overnight repurchase agreement rates on U.S. Treasury securities.  The Notice states that publication of the rates is “targeted to commence by mid-2018” and is “intended to improve transparency into the repo market by increasing the amount and quality of information available about the market for overnight Treasury repo activity.” Continue Reading

Bankruptcy Court Affirms Auction Process Used Following Repo Counterparty Insolvency

In a remaining vestige of the financial crisis, the U.S. Bankruptcy Court for the District of Delaware (“Court”) recently issued an opinion upholding a repo counterparty’s sale of collateral following the insolvency of the counterparty to the repo. The Chapter 7 Trustee for the insolvent counterparty had challenged the sale on the basis that the sale, conducted through an auction, was not conducted in good faith or in a commercially reasonable manner and therefore violated the repurchase agreement.  At auction, an affiliated trading desk of the non-defaulting party submitted the winning bid (there were 2 bids submitted) and took possession of the securities upon payment of the auction price.  The issue was distilled and examined on the basis of the following three components:

  1. was the decision to determine the Net Asset Value of the securities held as collateral rationale or in good faith;
  2. was the auction process in accordance with industry standards;
  3. was the non-defaulting counterparty’s acceptance of the value obtained in the auction rationale or in good faith.

Continue Reading

Federal Reverse Repo Program Update

On June 14, 2017, the Federal Reserve Bank of New York (FRBNY) issued an update on the operation of their reverse repo program (RRP).  The update indicates that the offering rate on the RRP will be 1.00% following the Federal Open Market Committee’s (FOMC) meeting on June 13-14, 2017 and their decision to maintain the federal funds rate in a target range of 1% to 1.25%.  Each counterparty is subject to a $30 billion per day limit, and the FRBNY estimates the size of available Treasury securities for the RRP to be approximately $2 trillion.  If the total value of bids received in an overnight RRP operation exceeds the available supply (which the FRBNY indicates is highly unlikely), the FRBNY’s Open Market Trading Desk will allocate awards via a single-price auction.  The auction will be based on the stop-out rate at which the overall size limit is reached; all bids below the stop-out rate will be awarded in full at the stop-out rate, and all bids submitted at the stop-out rate will be awarded on a pro rata basis at the stop-out rate.  As of June 14, 2017, the total cash value of reverse repurchase agreements (excluding foreign official and international accounts) held by all Federal Reserve Banks was $163 billion.

Repo Market Infrastructure Update – May 2017

There were two important market infrastructure developments in May:  (1) the approval of the Depository Trust and Clearing Corporation’s (DTCC) Centrally Cleared Institutional Triparty Service (CCIT Service); and (2) the establishment of BNY Mellon Government Securities Services Corp., a new wholly owned subsidiary of The Bank of New York Mellon Corporation (BNY Mellon). Continue Reading

Coming (Relatively) Soon: 3 Treasury Repo Benchmarks

On May 24, 2017 the Federal Reserve Bank of New York (FRBNY) published an update on their efforts to create and publish three Treasury repo benchmarks.  The FRBNY had previously announced its efforts to create such benchmarks in November 2016 (see our prior post here).  The update announced changes to the contemplated make-up of the benchmarks.  First,  FICC-cleared bilateral Treasury repo will be included in the broadest benchmark but will be “trimmed” to limit the influence of special transactions (e.g. on demand individual Treasury CUSIP).  Second, data from Federal Reserve open market transactions will be excluded from all benchmarks.  Lastly, only tri-party data from Bank of New York Mellon will be included. Continue Reading

Tri-Party Repo Data: March 2017

The Federal Reserve Bank of New York (FRBNY) released their monthly statistics of the U.S. tri-party repo market for March 2017. Beginning with the March 2017 data, the FRBNY will no longer publish the PDF and excel files containing single month statistics to which we ordinarily provide a hyperlink. Instead, tri-party repo statistics will only be available on a consolidated basis through the FRBNY’s tri-party repo interactive tool (available here) and master excel data file (current version here).

As of March 9, 2017, total collateral in the U.S. tri-party repo market rose over $102 billion to a new multi-year high of $1.804 trillion, which was the sixth straight month above the $1.70 trillion level. The increase is largely attributable to the increase of U.S. Treasuries excluding strips collateral by $126.26 billion to $945.44 billion – the highest collateral level since the FRBNY began publishing tri-party repo statistics. This was countered by a $32 billion (nearly 8%) month-over-month decrease for U.S. Agency Mortgage-Backed Securities.

Median margin levels largely remained stable. The median margin level for Investment Grade Asset-Backed Securities increased from 5% to 6%, while Private Label, Non-Investment Grade Collateralized Mortgage Obligations collateral decreased from 10% to 8%.

Good Day. DR2.

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