According to a panel at the Risk Management Association (RMA) Securities Finance and Collateral Management Conference, several businesses are concerned about the proposed US Treasury Clearing because they believe the implementation costs would exceed the advantages.
The panel discussing “Challenges and Economic Considerations in Cash Collateral, Fixed Income, and Repo” conducted a thorough examination of the difficulties that market players encounter, encompassing regulatory limitations, interest rate fluctuations, credit risk, and market volatility.
The panellists discussed how these economic variables influence risk management techniques, investment strategies, and decision-making in the securities finance industry.
The topic of discussion carried over from earlier discussions over the US Treasury clearing proposal by the Securities and Exchange Commission (SEC).
The proposal, which was made public last year, mandates clearing for both Treasury repo and cash transactions.
There is no explicit mention of securities lending in this plan. One panellist did suggest that it might eventually be scoped in, though.
All transactions must go via a central counterparty (CCP) according the Commission’s mandate. One panellist said that this will have the most effect on the repo market.
One panellist stated that while the SEC proposal had expenses as well as benefits, the “costs outweigh the benefits.”
The panellist summarised the positives of the proposal, which included “some” netting benefits among dealers, a decrease in the impact of any single counterparty default, and more resilience to the Treasury market structure overall.
Higher haircuts, which are necessary for every repo transaction, were one of the proposal’s expenses. The panellist contended that this will consequently raise the cost of conducting business, a cost that may be substantial.
Clients of hedge funds are concerned that they might be performing “less of a trade for more of a spread” if the plan is introduced to the market.
According to a panellist, this implies that even though the hedge fund client would be asking “the same amount of compensation” as they are currently receiving, they would not be able to “get as much leverage” because of the higher haircut requirements. The panellist made the case that spreads will have to increase.
This refers to dislocations, or situations where financial markets, functioning in challenging circumstances,
the panel heard, in which financial markets, functioning in difficult circumstances, stop pricing assets accurately both absolutely and relatively, are anticipated to rise in the Treasury and repo market.
Clients are asking firms when they think the clearing idea will become effective. It was confirmed by a panellist that the solution to this query is not known at this time.
Although it hasn’t been confirmed, some market participants believe that the SEC proposal will “be out soon,” with speculations suggesting an October release and a quick implementation schedule.
Karyn Corridan, head of US securities lending cash collateral solutions within the fixed income, cash and currency (FICC) division at State Street Global Advisors, addressed the panel.
Other panellists were Mark Cabana of Bank of America Securities, head of US rates strategy; Eric Hiatt of BlackRock, US head of cash portfolio management; and Michael Evan of BNY Mellon, senior portfolio manager. Ripal Tilara is a senior portfolio manager for Invesco Fixed Income.