Jan 9 -- The U.S. Department of the Treasury's Office of Financial Research (the Office) is requesting comment on a proposed rule establishing a data collection covering non-centrally cleared bilateral transactions in the U.S. repurchase agreement (repo) market. This proposed collection would require daily reporting to the Office by certain brokers, dealers, and other financial companies with large exposures to the non-centrally cleared bilateral repo market. The collected data would be used to support the work of the Financial Stability Oversight Council (the Council), its member agencies, and the Office to identify and monitor risks to financial stability. Comments must be received by March 10, 2023.
The Office of Financial Research (Office) is requesting comment on a proposed rule establishing a data collection covering non-centrally cleared bilateral transactions in the U.S. repurchase agreement (repo) market (proposed collection). This proposed collection would require reporting by certain U.S. covered reporters for repo transactions that are not centrally cleared and have no tri-party custodian. This proposed collection would enhance the ability of the Financial Stability Oversight Council (Council), Council member agencies, and the Office to identify and monitor risks to financial stability. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), the Office is authorized to issue rules and regulations in order to collect and standardize data to support the Council in fulfilling its duties and purposes, such as identifying risks to U.S. financial stability. In a 2022 statement on nonbank financial intermediation, the Council supported a recommendation made by the Council's Hedge Fund Working Group that the Office consider ways to collect non-centrally cleared bilateral repo data. Additionally, in July 2022 the Office consulted with the Council on efforts to collect non-centrally cleared bilateral repo data, including work on this proposed rule. As a part of this consultation, the Office described the structure and objectives of a pilot study of the non-centrally cleared bilateral repo market conducted in the summer of 2022. This pilot study critically informed the Office's collection efforts.
This proposed collection would require reporting on non-centrally cleared bilateral repo transactions, which comprise the majority of repo activity by several key categories of institutions such as primary dealers and hedge funds. In line with the Council's discussions on July 28, 2022, this proposed collection would provide visibility and transparency into a crucial segment of the U.S. repo market and, as explained below, the one remaining segment for which transaction-level data is not available to regulators.
Collection of information on the non-centrally cleared bilateral repo market is critical to the understanding of financial stability risks. The data proposed to be collected under this proposal will enable the Office to monitor risks in this market. Further, as the Council's duties relate to monitoring and responding to potential financial stability risks, the proposed collection supports the Office's statutory mandate to support the work of the Council.
The multitrillion-dollar market for repo transactions allows financial institutions to lend or borrow cash, usually overnight, using securities as collateral. A repo transaction is the sale of assets, combined with an agreement to repurchase the assets at a future date at a prearranged price. Repos are commonly used as a form of secured borrowing. The assets underlying the repo are used as collateral to protect the cash lender against the risk that the securities provider fails to repurchase the assets underlying the repurchase agreement. Market participants use repos for many reasons, such as to finance securities holdings or to borrow specific securities for use. Central banks also use repos as an important monetary policy tool. The interest rate on repo borrowing is calculated based on the difference between the sale price and the repurchase price of the assets underlying the repo.
Cash lenders typically require over-collateralization from borrowers to protect themselves against a decline in the value of the securities subject to repurchase. In the non-centrally cleared bilateral repo market, the value of the securities pledged as collateral is discounted, which is referred to as a haircut. Margin requirements provide additional buffers for the variation in the value of collateral. Initial margin is a buffer meant to cover the costs of early termination of repo contracts. Drawn upon contingently, initial margin differs from a second type of periodically adjusted margin. If the market value of the collateral falls during the life of the repo, the cash lender has the right to call on its counterparty to deliver additional collateral, known as variation margin, so that the loan remains over-collateralized against future adverse price movements.
Repo transaction documentation specifies the agreement terms, including the types of securities that are acceptable to the cash lender as collateral, and risk management protocols. These protocols include haircuts and margin requirements, which address the costs related to variation in collateral value underlying repo transactions. Participants may have arrangements with each other to offset repo borrowing and lending agreements according to certain conventions. These arrangements, referred to as netting practices, relate to risk management considerations and the economic terms on which repo transactions are negotiated. Firms may employ netting practices across asset classes and instrument types outside of repo markets, on a portfolio basis. Stated differently, a repo market participant may manage netting practices on a repo counterparty across a range of financial exposures. Alternatively, a pair of counterparties may also manage their netting practices only within the context of repo transactions.
Repos can be entered into with a range of fixed maturities, though repos are often overnight transactions. For term repos, repo rates can be negotiated on either a fixed or floating basis. There are also open-tenor repos, which do not have a fixed maturity and are instead renewed by mutual agreement. A lender and a borrower may also write a repo contract to give the option to recall cash or collateral early or extend trades, especially for longer-tenor agreements with less-liquid collateral.
FRN:
https://www.federalregister.gov/d/2022-28615 [17 pages]
