JP Morgan led the way in 2011, with several key initiatives in the custody and clearing space. The multi-trillion-dollar tri-party repo market underwent a major overhaul during the year, following recommendations made after the 2008 market crisis and counterparty failures when regulators identified it as a major risk due to heavy reliance on intra-day funding.
A task force was set up to address a host of issues that arose out of the financial crisis. Although some of these are yet to be resolved, the market changed significantly by the end of 2011, with JP Morgan taking significant leadership role as co-chair of the Operational Arrangements Working Group.
One significant development was auto substitution, which minimises the use of cash as collateral and reduces unsecured depositor risk as investors are able to remain collateralised by eligible intra-day and overnight securities. Through the substitution process, dealers and investors can maintain true term exposure to the counterparty with which they have contracted, reducing the need for the daily unwind without affecting market liquidity. JP Morgan Auto Substitution is unique in substituting assets with other eligible securities to allow the release of assets held in tri-party repo loans.
JP Morgan Auto Substitution is unique in substituting assets with other eligible securities to allow the release of assets held in tri-party repo loans
JP Morgan also successfully delayed the morning unwind to 3:30pm, with the aim of reducing the reliance on intra-day credit. The early morning unwind had previously returned cash to the investor and let dealers use their securities during the trading day. Three-way trade confirmation was achieved, with 99% of all tri-party repos booked daily through JP Morgan confirmed through counterparties by the task-force deadline. The process increased market transparency for cash investors.
JP Morgan’s GlobeClear platform offers clients a single access point to global markets, clearing on more than 60 markets and 27 trading venues and covering 48 trading platforms. It covers cash, equities –including 95% of the European market – exchange-traded funds, government and corporate bonds, and repos.
The bank can help clients consolidate clearing activities with a single central counterparty to help reduce clearing fees, improve post-trade inefficiencies and reduce complexity.
“This award reflects the many innovations and operational enhancements we made in 2011 during a period of intense market and regulatory change,” said Michael Katz, Americas Clearance Product Director at JP Morgan.
JP Morgan Americas Market Strategist Bob Bosse said: “Auto substitution and our leadership in US tri-party market reforms were key to this win, and we look forward to working closely with our broker/dealer clients to achieve the reform target in the next 18 months.”
This is a market story to watch over the next two years as market participants navigate through the remaining systemic issues.
(Pictured Michael Katz, Americas Clearance Product Director and Bob Bosse, Americas Market Strategist, JP Morgan)
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