Last week JP Morgan announced it is leaving the GCF repo settlement business. While this is quite a niche, and not very glamourous part of the trading world, it is still significant.
GCF repo (or general collateral finance repo) is a way for dealers to gain collateral and secure funding for other trades. Dealers submit GCF repo trades anonymously, through interdealer brokers, with trades settling at one of the two clearing banks.
However with JPM gone, it now leaves BNY Mellon as the only provider for GCF repo clearing and settlement.
The exit of the investment bank signifies not only a potential concentration risk, but also many other problems.
Firstly, it shows the dramatic reduction in the market for GCF repo settlement. According to a study from Liberty Street Economics, a research division of the New York Federal Reserve, settlement in the GCF repo market has shrunk from more than $250 billion in 2012 to $175 billion at the end of 2015.
Secondly, the exit is to affect around 30 bank and broker clients, including Credit Suisse, HSBC and RBS, showing the reluctance among the US investment giant to service non-US banks.
Thirdly, with just one provider attention could shift to the US Treasury and whether it will allow BNY Mellon to act as the sole provider for GCF repo settlement. While JP Morgan only commanded around 20% of market share, the Treasury may have to step in and encourage to buy the business in order to prevent a monopoly.
Finally, what does this mean for the development of repo clearing in the US? With the DTCC’s Fixed Income Clearing Corporation (FICC) as the only clearer of GCF repo, efforts have been made with other clearing houses such as LCH and CME to develop a repo clearing business. According to one source with knowledge of the matter, LCH was attempting to develop the business with JP Morgan, but has since suspended the project (maybe due to the fact that the bank was not supportive of it knowing it is going to exit).
And could this affect overall liquidity in the triparty repo market?
“We have also seen a shift to bilateral repo as participants avoid the use and cost of the tri-parties,” says Philip Picariello, SVP and head of short-term investment management at eSecLending.
So with just one provider left and further concentration in the triparty repo market, we could see more problems arise.