Citi: DTCC Repo Changes Minor
Citi's Steve Kang writes on "SEC approved DTCC repo clearing" in his latest "Short-End Notes." He says, "The DTCC announced that the SEC approved two rule changes to expand central clearing of repo: 1. Centrally Cleared Institutional Tri-party (CCIT). Under CCIT, non-RICs (like corporates, SMAs) would be able to lend within their centralized platform.... We continue to expect minimal impact on GC repo rates as lenders would still be selective on borrowers, given that the design of the loss waterfall and netting benefits for dealers are likely to be marginal. 2. Sponsored DVP repo service. In the current design, dealers can sponsor RICs (such as 2a7, mutual funds) and sponsored entities can lend cash in DTCC's cleared platform through dealers. The new rule would allow non-RICs (such as hedge funds and REITs) to be sponsored by a member dealer but also more importantly, RICs/non-RICs alike would be able to borrow cash through a sponsoring dealer. The sponsoring dealer in turn can net the borrowing/lending with other DTCC transactions, therefore could pass-through netting benefits to end users. The netting aspect may bring tightening pressure in GC repo going forward. However, the dealer's appetite for sponsoring borrowers is unclear. For one, netting members contribute to capped contingency liquidity facility (CCLF) to cover a dealer default.... Though this is a good first step towards repo CCP, we reiterate our view that we expect minimal impact on repo spreads (GC to 2a7 repo rate) for now. This is because the economics of sponsorship may not be commercially viable given the cost of liquidity and resources. It is possible for borrowers to leverage their other businesses with dealers to get sponsorship from dealers. We will keep a close eye on further developments."
