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Banks, Asset Managers Asked to Cover Cash Shortfalls in Repo Markets

The Wall Street Journal reports that Depository Trust and Clearing Corporation has proposed that  large banks and asset managers cover cash shortfalls if a member of its Fixed Income Clearing Corp. (FICC) defaults.  The article points out that FICC has been under pressure from the Federal Reserve and SEC to increase its capital cushion.

FICC is the only clearinghouse in the U.S. repo market.  It takes collateral and guarantees the obligations of its members (typically large, securities dealing banks).  In the event of a default of a member bank, FICC would have collateral, but not cash to deliver to the defaulting firm’s repo trading partners.  According to the article, the proposed plan would ease FICC’s cash issues by obtaining early commitments from the banks and asset managers (including Bank of New York Mellon, State Street, Vanguard, Fidelity, and BlackRock) to buy U.S. Government bonds.  The article states that the plan could benefit banks and asset managers by improving access to “haven” securities in times of market stress and could reduce pressure on the Federal Reserve’s last-resort money market facilities.  However, some small managers have been less receptive to the plan, and have threatened to leave FICC without an alternative solution.