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The Office of Financial Research (OFR), a formidable research arm of the U.S. Treasury Department, announced on Monday the adoption of a final rule enabling the collection of data on select transactions within the repurchase agreement (repo) market.
In the repo markets, where banks and entities like hedge funds engage in short-term borrowing backed by securities like Treasuries, much of the activity occurs bilaterally between brokers and customers.
Through the establishment of data collection for non-centrally cleared bilateral transactions, regulators aim to enhance transparency in this crucial yet opaque funding market for Wall Street.
According to the OFR, the collected data will support the efforts of the Financial Stability Oversight Council, its member agencies, and the OFR itself in identifying and monitoring risks to financial stability.
This permanent data collection initiative is set to illuminate previously obscured aspects of the financial market, providing regulators with high-quality data on non-centrally cleared bilateral repo transactions and eliminating significant blind spots.
The finalized rule, effective 60 days from Monday’s publication, outlines two categories of companies subject to reporting, sets a timeline for data submission, and specifies the required data elements for reporting.
This announcement aligns with broader regulatory endeavors aimed at mitigating potential stress episodes in the $27 trillion U.S. government debt market, a cornerstone of the global financial system.
Of particular concern is the basis trade, a widely-used hedge fund arbitrage strategy in Treasuries largely funded through bilateral repo deals. The unraveling of this trade exacerbated market stress during the height of the COVID-19 pandemic in March 2020.
In December, the U.S. Securities and Exchange Commission greenlit a pivotal reform to promote central clearing for U.S. Treasuries, extending to both the cash Treasury and repo markets. Increased central clearing could mitigate the risk of disruption to counterparties stemming from the rapid unwinding of hedge funds’ leverage, analysts suggest.
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