Tri-Party Repo: Will the Gears Still Turn
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- Drusilla Wade
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2 Tri-Party Repo: Will the Gears Still Turn Vic Chakrian Assistant Vice President, Financial Institution Supervision Group Federal Reserve Bank of New York MODERATOR Ed Corral Executive Director Morgan Stanley PANELISTS Michael Katz Executive Director, Product Management JPMorgan Chase & Co. Helen Lloyd-Davies John Morik Senior Legal Counsel Managing Director, Broker Dealer Services Fidelity Investments BNY Mellon Murray Pozmanter Managing Director, General Manager, Clearing Services DTCC
3 Gain Insight into Tri-Party Repo Reform October 7,
4 Status of Industry Road Map The Tri-Party Repo (TPR) Infrastructure Reform Task Force s 2012 final report provided a seven-point roadmap containing key elements of the TPR infrastructure Target State Task Force roadmap BNYM JPMC Remove non-maturing trades from unwind DTC Collateral: Q Fed collateral: Q Q Batch settlement process Q Q Common rule set for settlement prioritization Q Q Centralize, streamline and Q Q automate collateral allocation and optimization 10% cap on committed credit Q Q Eliminate need for intraday credit to settle maturing trades by making unwind and rewind simultaneous * Integration of GCF repo settlement with TPR settlement DTC Collateral: Q Removal of rolling trades from unwind: Q End of Day Settlement Process: Q Intra-bank: Q Inter-bank: 2015? Removal of rolling trades from unwind: Q Simultaneous unwind/rewind for all remaining TPR trades: Q Intra-bank: Q Inter-bank: 2015? *BNYM and JPMC have implemented different settlement solutions for what was originally noted as simultaneous exchange. 3
5 Intraday Credit Reduction Intra-day credit reduction has occurred in phases starting Q Total credit usage is currently approximately 5% JPMC implemented a capped committed credit facility in Q BNYM expected to implement capped committed credit in Q
6 J.P. Morgan Status o Key Summary Points 2013 / Q Milestones Elimination of unwind for rolling TPRs (completed Q2 2013) Maturing TPR will not be unwound if rolled to new matched TPR (same trade amount, same collateral, varying repo rate across trades); if matched before 3:30 with certain conditions met, target TPR will be rolled and interest will be paid GCF integration: Repo Net Settlement (completed Q2 2013) GCF repo transactions settle on net basis and cash adjusted based on prior and current day GCF repo Rolling Settlement 100% Unwind elimination (completed Q Q1 2014) Unwind for maturing TPRs replaced by one or more cycles of TPR maturation and settlement TPRs matured in pre-defined sequence based on available funding Funding from new TPRs used to mature existing TPRs via simultaneous exchange when collateral requirements met Secured Committed Clearance Advance Facility TPR Credit committed and capped < 10% (Q Q1 2014) Credit extended by JPM to mature tri-party and GCF repos up to pre-defined levels on a committed basis JPMorgan has eliminated the unwind and achieved the reduction of Tri-party credit set forth in the target end state of U.S. Tri-party Repo Market Reforms JPMorgan continues to work on additional GCF changes 6
7 BNY Mellon U.S. Tri-Party Repo Infrastructure Reform Program Timeline 7
8 Remaining Challenges Timely funding of tri-party repo will be a critical success factor o Dealers funding should be received by 3:30pm o Investor funding should be received early in settlement window o Clearing banks will need to recycle the liquidity efficiently Vast majority of tri-party must settle by 5:15 7
9 Centrally Cleared Institutional Tri-Party Description: Add a new service that will compare, net and settle Tri-Party transactions for members Create a new membership type for Tri-Party cash lenders Registered Investment Companies (RICs) will be eligible for the new membership type Trade guarantee upon comparison Collateral eligibility will follow the GCF Repo model Leverage existing processes with the clearing banks for settlement Settlement will occur at the clearing bank of the Repo Counter-party Rules based liquidity provision in the event of a member default 8
10 Centrally Cleared Institutional Tri-Party Benefits: Reduction of counterparty risk through GSD guaranteeing the completion of settlement in a member default scenario CCP guarantee may mitigate the risk of large scale exit from tri-party markets by cash investors in a stress scenario Centralized liquidation of a failed counterparty would reduce the potential for market disruption and fire-sale Decreased settlement and operational risk through CCP netting, novation and risk management. In cases where the dealer was reversing in securities and then pledging them to Tri-Party, the dealer would flatten out completely and the risk associated with these trades would be offset Fully collateralized market risk with uniform margining methodologies applied to the marketplace Current Status: Speaking with RICs, Dealers and both clearing banks to define the service Initial service description provided to our Regulators Finalizing business terms for the new service Targeting end Q for Draft Rule Filing submission to the SEC 9
11 Appendix Appendix Appendix 11
12 J.P. Morgan s TPR Reform Initiatives J. P. M O R G A N T P R R E F O R M S U M M A R Y
13 Thank You
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