New Reporting Rule Brings Repo Transactions Out of the Shadows

Regulators monitoring financial-stability risks are about to get a clearer view into a crucial but historically opaque segment of the U.S. repurchase-agreement, or repo, market.

A final rule from the Office of Financial Research (OFR), adopted in May and effective July 5, requires daily reporting by brokers and others with large NCCBR (non-centrally cleared bilateral repo) exposures. NCCBR is the biggest of the repo categories – they are labeled as centrally cleared and non-centrally cleared, tri-party, and bilateral – and is “the last segment for which regulators do not have a transaction-level data source,” as explained in the rule filing.

The OFR, a U.S. Treasury Department entity that supports the work of the Treasury-led Financial Stability Oversight Council (both were created by the Dodd-Frank Act of 2010), turned its attention to bilateral repo in 2022. James Martin, currently OFR acting director, noted then that the OFR had addressed another repo gap “in 2019 by collecting data on centrally cleared transactions.”

OFR Acting Director James Martin

The NCCBR notice of proposed rulemaking was issued in January 2023. On May 6 this year, announcing adoption of the final rule, Martin said, “The OFR consulted with the council, held extensive discussions with market participants, successfully completed a pilot data collection, and carefully considered public comments on our proposal. The OFR’s permanent data collection will shine a spotlight into this opaque corner of the financial market, provide high-quality data on NCCBR transactions, and remove a significant blind spot for financial regulators.”

Majority Support

The OFR’s rule applies to firms whose average daily total outstanding repo commitments are at least $10 billion. About 40 broker-dealers and government securities dealers fit that description and will submit significant quantities of transaction data for financial-stability analysis by the OFR. That is to be shared with the oversight council and its constituent regulatory bodies.

The rule was supported by the Financial Industry Regulatory Authority and trade groups including the Securities Industry and Financial Markets Association.

One that demurred was the Managed Funds Association. It advocated in a comment letter laying the reporting obligation primarily on dealers, placing them at the top of a reporting hierarchy that resembles today’s swap market, and postponing reporting on nongovernment repos pending further cost/benefit analysis.

In the published rule document, the OFR said, “Although the majority of commenters supported the proposed collection, noting the potential benefits to the monitoring of risks to financial stability, several identified issues that the office has addressed . . . and, in some cases, through regulatory text changes reflected in the final rule. In making these changes, the office intends to minimize the burden of the final rule while ensuring that the purposes of the collection” program are fulfilled.

Prepared for Processing

The OFR is “well set up” in terms of infrastructure to deal with large quantities of data, said Jill Cetina, a former OFR associate director of policy studies who will join Texas A&M University’s Mays Business School on July 1 as executive professor of finance and associate director of the commercial banking program.

Stacey Schreft, OFR deputy director for research and analysis, said that the office will draw from data science, financial economics, computer science, operations research and other disciplines in seeking to understand, for example, “how balance-sheet leverage is created and augmented through NCCBR.

“We would also like to understand,” she added, “how funding costs in NCCBR transmit to secondary-market liquidity in times of stress.”

The OFR estimates that NCCBRs make up 60% of the $2 trillion-plus total repo exposure.

Speaking on June 5 at the ISDA/SIFMA Treasury Forum in New York, Securities and Exchange Commission Chair Gary Gensler referred to the use of leverage in the Treasury markets “often facilitated by prime brokerage relationships between hedge funds and nonbank intermediaries on the one hand and banks and broker-dealers on the other.” In a 2022 OFR NCCBR pilot study, he pointed out, 74% of the volume “was transacted at zero haircut.”

Reforms that the SEC has been coordinating “with our partners at the U. S. Treasury, Federal Reserve, Federal Reserve Bank of New York and Commodity Futures Trading Commission,” Gensler added, have had the goal of promoting “the efficiency and the resiliency of these markets . . . through access, transparency, competition and facilitating all-to-all trading,” effectively lowering costs on behalf of taxpayers.

How non-centrally cleared bilateral repo volume compared with general collateral financing and delivery-versus-payment transactions for nine OFR pilot participants on June 15, 2022.

LTCM as Precedent

The OFR cited as a cautionary case the 1998 collapse of Long-Term Capital Management, which “built up large counterparty exposures through NCCBR.” The hedge fund “conducted its repo and reverse-repo transactions with 75 different counterparties, many of which were reportedly unaware of the nature of LTCM’s total exposure. These large exposures created through repo were a key source of systemic stress from LTCM’s failure, as liquidations of the underlying collateral in bankruptcy could have resulted in significantly depressed prices and broader market disruptions. While transparency into other segments of the repo market has increased since 1998, the NCCBR market segment has remained opaque.”

Market opacity and exploitation of accounting loopholes – which have since been subjected to Financial Accounting Standards Board revisions – were problematic in the bankruptcies of Lehman Brothers in 2008 and MF Global in 2011.

Despite cumulative reforms since the Great Financial Crisis, “there’s still significant repo going on that can also involve collateral types that could potentially pose risks to the financial system again,” said Cetina, who has also served as associate managing director in Moody’s Ratings’ financial institutions group and vice president of supervisory risk and surveillance at the Federal Reserve Bank of Dallas.

Treasury Clearing Effect

The SEC’s central clearing rule for Treasury securities – one of the reforms Gensler alluded to, taking full effect at the end of June 2026 – includes repos and will provide regulators with much the same data for those instruments. The OFR estimates that as a result, NCCBRs will contract to between $300 billion and $600 billion. That remains “large enough to warrant continued monitoring in light of the risks particular to this segment,” it says.

“History shows that it’s valuable to U.S. financial stability for regulators to have data and an understanding of what’s happening in repo markets, particularly repo backed by less liquid, riskier and difficult-to-value collateral types,” Cetina said.

Excessive use of short-term repos to finance longer-term assets can be a recipe for trouble spilling over into the broader economy, she said. And there is a risk of Treasury-market shocks until there is meaningful change in U.S. fiscal policy to better manage the national debt. For now, the repo reporting rule and Treasury financing changes announced in May serve to improve regulators’ visibility.

“If you’re looking for opacity in terms of using large amounts of short-term financing to fund long-term assets, then this is probably not your favorite rule,” Cetina said. “But these data are a win” for financial stability.