Finish Line in Sight – Achieving the Target End State for U.S. Tri-Party Repo Market Reforms
By Michael Katz, Americas Head of Securities Clearance and US Broker Dealer Tri-Party
30% and counting down
J.P. Morgan significantly reduced the credit extended to dealers in its U.S. Tri-Party Repo business during the second quarter. New tools enable dealers to process the settlement of their repo transactions in an operationally efficient manner, reducing the need for clearing bank credit extension by:
- Eliminating the unwind for trades that roll. Maturing trades that are replaced with a new trade with the same profile (same counterparty, terms and amount) no longer require credit. By settling rolling trades throughout the day using J.P. Morgan’s technology, dealers can focus on maturing other trades after 3:30 p.m.
- Netting General Collateral Finance (GCF) repo transactions. These transactions had previously unwound on a gross basis, requiring an extension of credit for the full amount until new funding was in place. Now, maturing and new trades are netted, reducing credit requirements to correspond to the difference between the maturing trade and anticipated new funding.
Together, these changes have reduced the need for intraday credit by 70%, or hundreds of billions of dollars. Eliminating the uncommitted credit extended by the clearing banks is a key goal of the NY Federal Reserve Bank-sponsored TPR Market Infrastructure Task Force.
The final steps
J.P. Morgan aims to implement the last deliverables to achieve the Target End State by year end. Three linked initiatives will virtually eliminate J.P. Morgan’s extension of uncommitted credit for tri-party:
- Rolling settlement will allow dealers to initiate the maturation and settlement process of repos after 3:30 p.m., expediting the return of cash for maturing trades.
- Simultaneous exchange of cash and collateral will keep transactions fully collateralized.
- A new secured committed credit advance facility will allow dealers to obtain secured financing from J.P. Morgan at competitive rates, up to pre-negotiated limits, to cover short-term financing shortfalls.
J.P. Morgan continues to work closely with dealers and cash investors to prepare them for upcoming deliverables and changes. Once the Target End State is met, we will continue to introduce additional GCF repo functionality and other capabilities to support our clients’ need for complete collateral portfolio solutions.