Canada’s clearing and netting system for fixed income repurchase transactions (repo) has evolved and progressed, says a study from Deloitte.
The Canadian Central Counterparty (CCP) for repo launched in 2012 to protect market liquidity in the event of a financial crisis. The 2008 financial crisis created periods of illiquidity in debt trading, precipitating the end of Lehman Brothers and Bear Stearns.
“Repos play an important role in the global financial market by allowing institutions to monetize their assets,” says the study. They do so by “bringing together two financial market users, one that has cash and is prepared to enter into a secured loan [buy-side], and one that requires cash and has the security to offer as collateral [sell-side].”
The CCP’s launch represented a milestone for Canada, says the study, and demonstrated collaboration by market participants, notably the Investment Industry Association of Canada (IIAC) and the Canadian Derivatives Clearing Corporation (CDCC). IIAC and the CDCC commissioned the Deloitte study.
The CCP has progressed in several areas, including the addition of buy-side participation in repo clearing—making Canada the first jurisdiction to do so. In most countries, sell-side institutions are the dominant players in the repo market.
Buy-side participation has “increased total volumes cleared by the CCP and as a result, increased the potential for netting and efficiencies in the market,” says the study.
The list of securities eligible for clearing has also expanded.
To continue to evolve and enhance the CCP’s operations and infrastructure, the CDCC is in the process of addressing additional issues, including increasing the volume of cleared transactions and establishing a properly governed and risk-assessed operating model for the clearing system.
For full details, read the study on the Canadian Central Counterparty for repo.
About the study: Content is a compilation of research and interviews conducted during July and August 2018, with sell-side (banks) and buy-side (pension plans) institutions, CCP operators and general background information from the Bank of Canada.