Lynn Strongin Dodds looks at the OFR’s final rule and the data as well as reporting requirements that firms will have to meet.
The Office of Financial Research (OFR) adopted a final rule which aims to improve transparency within the US repurchase agreement (repo) market by establishing a data collection for non-centrally cleared bilateral transactions.
The new rule also requires daily reporting to the OFR by U.S. covered reporters with large exposures to the non-centrally cleared bilateral repo (NCCBR) market – currently the largest of the four repo market segments at an estimated more than $2 trn in outstanding commitments each day.
Regulators don’t have access to transaction level details for the bilateral repo market, only for centrally and non-centrally cleared trades as well as tri-party agents.
The rule, which becomes effective 60 days from the May 6 publication, sets up two categories of companies subject to reporting as well as a timeline for the submission of data and a number of specific data elements required to be reported.
The collected data will be used to support the work of the Financial Stability Oversight Council (Council), its member agencies, and the OFR to identify and monitor threats to financial stability.
Most hedge fund activity in repo markets – where banks and other players such as hedge funds borrow short-term loans backed by Treasuries and other securities – is done bilaterally between brokers and customers.
According to James Martin, acting director of the OFR, the organisation wanted to develop a permanent data collection after receiving recommendations from the Council. It “consulted with the Council, held extensive discussions with market participants, successfully completed a pilot data collection, and carefully considered public comments on our proposal,@ he added.
The OFR added, the “permanent data collection will shine a spotlight into this opaque corner of the financial market, provide high-quality data on non-centrally cleared bilateral repo transactions, and remove a significant blind spot for financial regulators.”
The wheels were set in motion last year when the OFR first proposed the rule, according to analysis by Cappitech. It noted that reporting was only required by US financial companies, there would be no intersection with the financial companies covered by foreign collections.
This would include transactions by the covered reporter settled internationally or denominated in currencies other than in USD.
The OFR estimates approximately 40 entities, including primary and nonprimary dealers, and bank and nonbank-affiliated dealers, would be impacted by the new requirement.
Although the new rule is often compared to the Securities and Exchange Commission 10c-1, Cappitech notes that there is less overlap as it aims to include trades executed under master repurchase agreements (MRA) and global master repurchase agreements (GMRA) and will exclude sell-buyback as well as any securities lending transactions.
The 10C-1 was enacted last October, requires that market participants, financial supervisors and the public have access to fair, accurate and timely information relating to loan transactions.
These new rules are part of the regulators’ wider effort to contain potential episodes of stress in the $27 tn U.S. government debt market – which is an important building block of the global financial system.
In particular, regulators have focused on the basis trade, a popular hedge fund arbitrage trading strategy in Treasuries which is largely financed through bilateral repo deals. The unwinding of this trade is believed to have worsened market stress at the height of the pandemic in March 2020.
The new rules require firms designated as dealers to be more transparent about their positions and trading activity and force them to hold capital to back their deals.
In December, the SEC approved a key reform to boost the use of central clearing for Treasuries which will apply to the cash and repo markets. More centrally cleared trades could reduce the risk of disruption to counterparties caused by a rapid unwinding of hedge funds’ leverage, according to analysts.
