US post-trade market infrastructure giant, the Depository Trust & Clearing Corporation (DTCC), has launched its Sponsored General Collateral (GC) Service, a new offering from its Fixed Income Clearing Corporation (FICC) subsidiary. The first trades have been executed by BNY Mellon, Federated Hermes and JP Morgan Securities.
Institutional investors are now able to accept Agency Mortgage-Backed Securities (AMBS) as collateral on overnight cleared repo transactions via FICC’s new sponsored General Collateral (GC) service through BNY Mellon’s sponsored member programme (SMP).
“BNY Mellon is live with a money market fund and we expect others to follow in short order,” says Mark Haas, global head of principal securities finance at BNY Mellon. “Tradable amounts are a function of market dynamics, as well as risk appetites from both Sponsors and their members. However, as we can see from the volumes in Sponsored Repo, appetites can be quite large given the nature of the central clearing construct.”
Murray Pozmanter, head of Clearing Agency Services at DTCC says, “We are pleased to work with BNY Mellon, Federated Hermes and JP Morgan Securities in making this new service a reality. FICC’s Sponsored Service has become an integral part of the US repo market, and the new Sponsored GC Service will enable us to further enhance risk management through broader access to central clearing. We look forward to welcoming clients to the service while also continuing our work with Broadridge.”
The new Sponsored GC Service allows sponsoring members and their clients to submit triparty repo transactions executed on a general collateral basis across US Treasury securities, agency debentures and agency mortgage-backed securities collateral to central clearing. Users are expected to see a reduction in operational and counterparty risk, potential balance sheet and capital relief, and access to greater market liquidity. The new service has been launched in collaboration with BNY Mellon and with the support of Broadridge.
“It’s no surprise that money funds are the first movers in this space given their presence in repo markets, but much like the evolution of the legacy US Treasury offering, we anticipate this will expand to include other institutional investors such as insurance companies, public finance entities, central banks, sovereign wealth funds, pension funds and Mortgage REITS, just to name a few,” Haas adds.
“We’ve worked very closely with DTCC and BNY Mellon over the past few years to bring DTCC’s recent enhancements to the Sponsored Service to life by helping to connect Broadridge users with FICC,” said John Garahan, head of North American Fixed Income at Broadridge. “Broadridge is excited to roll out this latest offering under FICC’s Sponsored Service umbrella to enable clients to take full advantage of these programmes.”
While full-service clearing members of FICC were previously able to clear AMBS repo, the expansion of BNY Mellon’s SMP represents the first time that sponsored members have been able to access cleared repo backed by these securities, opening up a US$11.4 trillion asset class and enhance the collateralised investment financing potential for buy-side investors.
Beyond its role as a sponsor, BNY Mellon will also provide the underlying clearance infrastructure for the new FICC Sponsored GC Service. All sponsored GC repo transactions cleared at FICC will settle on BNY Mellon’s triparty platform, in a similar fashion to how triparty repo transactions are handled outside of central clearing today. By enabling sponsored members to access FICC through the triparty repo platform, clients could enjoy operational efficiency in clearing their overnight and term repo transactions.
The number of sponsors has grown to 29 as of August 2021 with over 1800 sponsored member clients using FICC’s sponsored service, covering over 1,810 FICC-approved counterparts with peak sponsored notional of over US$564 billion, and approximately US$240 billion to US$300 billion in daily volumes. Additional Sponsored Members are expected to join the service in the coming months, including firms representing agency lending activity, foreign clients, supranationals, municipalities and home loan banks.
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