Researchers set up pilot program designed to open ‘unique window’ into ‘opaque’ portion of repo market

Providing a “unique window” in the non-centrally cleared bilateral repurchase agreement (repo) market is the aim of a pilot project sponsored by the Treasury’s Office of Financial Research (OFR), the agency said in a release Monday.

According to a paper released by the agency, the OFR is conducting the project to provide more information to regulators about the non-centrally cleared bilateral repo (NCCBR) market. The OFR said the NCCBR segment of the repo market “remains opaque to regulators.” That is despite the fact, the OFR said, that it is the largest of the four repo markets with an estimated market size exceeding $2 trillion outstanding. Additionally, the agency said, it is the only segment of the market that contains neither a central counterparty nor a triparty custodian.

The agency said the NCCBR segment remains opaque to regulators. “Even the traders who conduct business in this market have little direct visibility into the competitive landscape,” the agency said in a release. “Given the size and importance of this market, regulators have expressed concern over this lack of transparency.”

To gather more information about the market, the OFR said it has secured the voluntary participation of nine dealers of the instrument for a pilot data collection. “These dealers include primary dealers and nonprimary dealers, bank affiliated and nonbank affiliated dealers, and both purely domestic dealers and dealers that are affiliates of foreign institutions,” the agency said.

Ultimately, the agency said, it wants its pilot program to expand into a permanent data collection, ultimately leading to a set of proposed rules – and maybe the reduction of the market’s size.

“Proposed rules expanding the cleared market may lead to volumes moving out of NCCBR, and reforms to the Treasury market may make relative value trades less attractive, while expanded issuance of Treasuries may increase volumes going through repo markets generally,” the agency said.  “Meanwhile, trades collateralized with more exotic collateral may again become more popular, driving further demand of NCCBR.”

The agency said its collection of data on the NCCBR market will allow regulators to evaluate the expansion of this activity going forward and provide transparency into potential financial stability risks in this key funding market.

OFR’s Pilot Provides Unique Window into the Non-centrally Cleared Bilateral Repo Market