DTCC, which operates the Fixed Income Clearing Corp (“FICC”), is seeking early commitments from participating banks and large asset managers to purchase U.S. government bonds, if necessary, to help cover any shortfalls in the event of a member default. Currently, FICC is the only clearinghouse for the $2.6 trillion U.S. repo market. In addition, the Federal Reserve and the SEC are requesting that FICC increase its capital cushion. DTCC estimates that FICC requires at least $50 billion in commitments from its members in order to protect against a large default. By pooling capital from its members, a clearinghouse such as FICC can protect against a “fire sale” of collateral in the event of a member’s default and instead, manage the orderly liquidation of such member’s positions.
At an annual conference late last year, Jerome Powell, a member of the Federal Reserve Board, spoke to the benefits of centralized clearing for repo transactions. In addition to orderly liquidation, other benefits included increased transparency in the repo market, a reduction in operational risk, and risk sharing among members. Governor Powell also noted that repo clearing could potentially provide, “greater opportunities for netting and related reductions in balance sheet costs for dealers affiliated with a bank holding company.”