REFILE-Markit, BNY Mellon bring transparency to tri-party repo
* Repo data, analytics to aid transparency, price discovery
* Collateral shortfall looms from regulatory change
By Alex Chambers and Helen Bartholomew
LONDON, March 19 (IFR) - Markit and BNY Mellon have teamed up to offer securities level data and pricing points in US dollar tri-party repo market, increasing transparency in an opaque but increasingly important financing market.
Markit already has an offering on the US$2trn stock lending sector while BNY Mellon Broker Services dominates the US$1trn dollar repo tri-partite market with an 80% market share.
The new product consists of security level data, built up from transactional information and includes various aggregated data with standard collateral categories, including Treasuries, ABS and corporate bonds.
Tri-partite repo is a key tool allowing broker dealers to finance securities, investors to find securities to hedge positions and for other cash rich parties to lend, but weak infrastructure came to light during the financial crisis.
"The regulatory context is that OTC derivatives is undergoing transformational development. And the Fed is pushing for the Tri-partite market to become more diverse and transparent in order to head off potential systemic risk," said David Carruthers, managing director, Markit Securities Finance.
There will be a beta trial over the next few weeks so clients can get to grips with the data, published two days after transaction date. The full launch should happen in early May.
Additional transparency generated by the new service could prove a vital part of the solution to an impending collateral crunch that looms as much of the US$639trn OTC derivatives completes the shift into central clearing.
New regulations that came into force earlier this month under the Dodd-Frank Act in the US and the EU's European Markets Infrastructure Regulation require all standardised swaps between financial counterparties to be cleared through CCPs.
Repo and collateral transformation are likely to be key markets in meeting some of the shortfall and more timely trade data that will be made available by the new venture should help boost transparency and potentially expand the use of repo as a collateral transformation tool.
"Collateral managers now have to decide whether to lend or borrow stock, to repo or reverse repo, and to understand how and when they should post direct to a central counterparty, buy the collateral in market or enter a collateral transformation swap," said Carruthers.
There is very little transparency in repo at present. Markit found with stock loan data that dealers can be surprised about the size and dimensions of the market when transparency was increased in the sector.
This innovation will help show what collateral is available and what the rate should be. The development also helps align BNY Mellon with the regulatory backdrop, Fed initiatives and the potential market opportunity from increased transparency.
"Knowing where the haircuts and margins are will become increasingly important given the additional collateral requirements, and it should make it easier for counterparties to transform assets into useable collateral," said one collateral specialist at BNY Mellon.
Estimates for the additional collateral requirement stemming from the OTC derivatives clearing mandate vary wildly - from as little as US$100bn according to the IMF, to as much as US$2.6trn according to financial research firm Tabb Group.
The actual requirement depends primarily on the impact of netting. A recent study by the Bank of England calculates the collateral requirement associated with OTC derivatives clearing to be anything between US$200bn and US$800bn, primarily dependent on netting.
That additional requirement comes at a time when the market for top-rated securities is shrinking as more sovereign issuers lose their Triple A ratings. Currently just 11 sovereign issuers carry a top rating from both Moody's and S&P. Last month, Moody's downgraded the UK to Aa1, stripping it of its Triple A status for the first time in more than 30 years.
Markit is building a front-end which it hopes will open up information to a wider group of participants such as collateral managers, money market funds, risk managers and corporate treasurers.