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.

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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.

Advisers Corner: SEC Staff Compliance Guidance For Robo Advisors

On February 23, 2017 the Staff of the SEC’s Division of Investment Management released “suggestions” on how robo-advisers meet their obligations under the Investment Advisers Act of 1940 (“Advisers Act”).   The Staff noted that their guidance was intended for robo-advisers that “provide services directly to clients over the internet” but noted that the guidance could be useful to other types of robo-advisers.

The Staff categorized its guidance into the following three areas:

  1. Disclosures to clients;
  2. Information required to provide suitable advice;
  3. Effective compliance program designed to address automated advice.

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US and European Regulators Issue Additional Relief from March 1st Variation Margin Deadline for Non-Cleared Swaps

Earlier today, European regulators and the Federal Reserve Board and the Office of the Comptroller of Currency provided additional relief (of sorts) from the March 1st variation margin deadline and related amendments of credit support documentation for non-cleared swaps.   This relief was provided by the regulators in recognition of the challenges faced by market participants in amending trading and credit support documentation in time for the March 1, 2017 variation margin deadline.  The following is a “Plain English” overview of where things stand in less than 300 words: Continue Reading

Defending Bankruptcy Exemptions for Repos and Sec Lending

One great thing about a new Congress is that bills pending at the end of the prior Congress must be reintroduced. This wipes the slate clean of problematic proposals and reduces the risk of something slipping through without sufficient debate. For example, the proposed Bankruptcy Fairness Act of 2016 (BFA) expired with the 114th Congress. The BFA would have required the Office of Financial Research (OFR) to produce a biannual report to Congress regarding, among other things:

whether amendments to the Bankruptcy Code … and other laws relating to insolvency to modify the treatment of qualified financial contracts and master netting agreements in future situations of insolvency could reduce—

(i)         losses in the value of the financial company and its assets;

(ii)        losses to other parties in interest;

(iii)       moral hazard; and

(iv)       risks to financial stability in the United States.”

While such a report may seem innocuous, it might have provided a gateway for eliminating the safe harbors for qualified financial contracts (such as securities contracts, repurchase agreements and derivatives contracts) from the Bankruptcy Code and the Federal Deposit Insurance Act. Continue Reading

More on Proposed Repo Benchmark Rates

In a previous post we summarized the FRBNY’s announcement that it was considering publishing three benchmark repo rates.  Recently the Liberty Street Economics blog (available on the FRBNY’s website) explored the goals of the proposed benchmarks as well as how each benchmark would have performed over the period from August 2014 to October 2016.

Highlights from the post include:

  • Bi-lateral repo is not included in the proposed benchmarks “since robust data on the bilateral repo market are currently unavailable.”
  • The tri-party market (excluding GCF repo and Fed repo) represents approximately two-thirds of the total tri-party repo market.
  • GCF repo is the smallest segment, representing about 10% on average while the Fed’s repo program represents “slightly more than 20 percent” on average.
  • The three benchmark rates tracked each other exactly approximately 60% of the time in the sample period.
  • In those periods in which they did not track each other the rate including GCF repo was generally slightly higher while the rate including Fed repo was slightly lower.

The blog post can be found here.

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