* 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,"
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