NYSE Liffe launches futures on GCF repo index

Index based on transactions, not estimates

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The following is from the DTCC...

The Depository Trust & Clearing Corporation (DTCC) welcomes the trading in futures contracts linked to its proprietary index, the DTCC GCF Repo IndexTM. The futures products began trading Monday, July 16 on NYSE Liffe U.S., the U.S. futures exchange of NYSE Euronext. Two-day volumes across US Treasury GCF Repo futures, MBS Repo futures and Agency GCF futures reached over 6,000 contracts traded. The DTCC GCF Repo Index brings greater liquidity and operational efficiency to the U.S. financing markets by allowing traders to hedge their interest rate exposure using the index as a benchmark which is linked to general collateral finance repurchase agreements (GCF Repos®).

“We anticipate firms will also look to adopt the index as a benchmark reference for interest rate swap instruments which will provide another tool for traders to hedge their short-term interest rate exposure.”

The DTCC GCF Repo Index is the only index that tracks the average interest rate paid each day for the most-traded GCF Repos contracts in the U.S. Treasury, federal agency and mortgage-backed securities (MBS), issued by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). These comprise instruments which clear at DTCC’s Fixed Income Clearing Corporation (FICC). The index’s rates are par-weighted averages of daily activity in the GCF Repo market and reflect actual daily funding costs experienced by banks and investors, per underlying asset class. The DTCC GCF Repo Index is a more precise measure of the interest rate market since it is based on fully executed transactions and not based on rate estimates which are principally used by other benchmarks.

“Futures on the GCF Repo Index provide bankers and investors, for the first time, with the ability to hedge interest rate exposure related to overnight funding costs for executed transactions,” said Murray Pozmanter, DTCC Managing Director and General Manager, Clearing Services. “Existing benchmarks are subjective rate estimates, which do not reflect actual, fully collateralized and centrally cleared repo transactions like the GCF Repo Index does. This new and innovative product has the potential to become an effective tool for mitigating short term interest rate risk.”

The index also reports the total par value of the GCF Repo transactions each day and serves as a reference rate by which certain derivatives, such as U.S. Treasury futures are traded. In addition Gary Chan, DTCC Managing Director, Clearing Services, Fixed Income Clearing Corporation, added, “We anticipate firms will also look to adopt the index as a benchmark reference for interest rate swap instruments which will provide another tool for traders to hedge their short-term interest rate exposure.”

“Products linked to the DTCC GCF Repo Index create better hedging vehicles for the short-term collateral markets and should bring in a new class of product to our clients,” said Christian Rasmussen, Head of the U.S. dollar repo business for UBS, a participant firm in the initial trading. “We believe the industry is looking for a truly valid, transparent index and, because of its relevance to repo, products on this index are a good hedge for collateral costs.”

DTCC developed the DTCC GCF Repo index in response to concerns of the Treasury Markets Practice Group (TMPG), sponsored by the Federal Reserve Bank of New York, surrounding the need for enhanced transparency in the Treasury, agency debt and mortgage-backed securities markets. Publication of the GCF repo rates on DTCC’s public website (www.dtcc.com) is another step DTCC has taken to bring greater transparency to global financial markets.

Repos are a form of term secured funding that involves the sale of a security and the subsequent repurchase, typically starting on the same day with a next day settlement. Unlike standard repos, in which contracts are executed on a specific security, GCF Repos are traded by general collateral categories and are settled net as part of the tri-party process. Trading in GCF Repos averaged more than $400 billion a day in 2012.

The NYSE Liffe US-listed futures based on the DTCC GCF Repo Index will clear at New York Portfolio Clearing (NYPC), a joint venture between DTCC and NYSE Euronext.

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