OFR Analysts Examine Central Clearing For Repos

In the latest installment of the Office of Financial Research ("OFR") Brief Series,  analysts estimated that risk exposure for dealers could be reduced by up to 81% if U.S. Treasuries repo services were extended to Central Counterparties ("CCP"). The analysts stated that this "potential reduction of exposures provides an economic incentive for repo market participants to use a repo CCP for dealer-to-non dealer transactions." The trade-off is that such an extension would increase the risk exposure for the CCP by as much as 75%.

The brief listed the following caveats: (i) a narrow focus "on direct economic benefits to market participants and increased exposure to CCP"; (ii) a lack of consideration of other potential benefits of central clearing (e.g., increased transparency); (iii) the use of data from a small group of dealers in 2015; and (iv) the volumes of transactions and the composition of market participants are unlikely to remain the same as they were during