Ongoing Data Collection of Non-Centrally Cleared Bilateral Transactions in the U.S. Repurchase Agreement Market

<RULE> DEPARTMENT OF THE TREASURY <SUBAGY>Office of Financial Research</SUBAGY> <CFR>12 CFR Part 1610</CFR> <SUBJECT>Ongoing Data Collection of Non-Centrally Cleared Bilateral Transactions in the U.S. Repurchase Agreement Market</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Office of Financial Research, Treasury. <HD SOURCE="HED">ACTION:</HD> Final rule. <SUM> <HD SOURCE="HED">SUMMARY:</HD> The Office of Financial Research (the “Office”) within the U.S. Department of the Treasury (“Treasury”) is adopting a final rule (the “Final Rule”) establishing a data collection for certain non-centrally cleared bilateral transactions in the U.S. repurchase agreement (“repo”) market. This collection requires daily reporting to the Office by certain brokers, dealers, and other financial companies with large exposures to non-centrally cleared bilateral repo (“NCCBR”). The collected data will be used to support the work of the Financial Stability Oversight Council (the “Council”), its member agencies, and the Office to identify and monitor risks to financial stability. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> <E T="03">Effective date:</E> July 5, 2024. <E T="03">Compliance Dates:</E> See the amendment to 12 CFR 1610.11(e). </EFFDATE> <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> Michael Passante, Chief Counsel, Office of Financial Research, (202) 921-4003, <E T="03">michael.passante@ofr.treasury.gov,</E> Sriram Rajan, Associate Director of Financial Markets, Office of Financial Research, (202) 594-9658, <E T="03">sriram.rajan@ofr.treasury.gov,</E> or Laura Miller Craig, Senior Advisor, Office of Financial Research, (202) 927-8379, <E T="03">laura.craig@ofr.treasury.gov.</E> </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">I. Executive Summary</HD> The Office is adopting the Final Rule to establish an ongoing data collection for certain non-centrally cleared bilateral transactions in the U.S. repo market. The Final Rule will require reporting by certain covered reporters for repo transactions that are not centrally cleared and have no tri-party custodian. The purpose is to enhance the ability of the Council, Council member agencies, and the Office to identify and monitor risks to financial stability. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the Office is authorized to issue rules and regulations to collect and standardize data that supports the Council in fulfilling its duties and purposes, such as identifying risks to U.S. financial stability. In a 2022 statement on nonbank financial intermediation, the Council supported a recommendation that the Office consider ways to obtain better data on the NCCBR market segment, and in July 2022 and February 2024, the Office consulted with the Council on efforts to collect NCCBR data. <SU>1</SU> <FTREF/> <FTNT> <SU>1</SU>  Financial Stability Oversight Council Statement on Nonbank Financial Intermediation. February 4, 2022. <E T="03">https://home.treasury.gov/news/press-releases/jy0587;</E> Meeting minutes. FSOC, July 28, 2022, page 7; Readout: Financial Stability Oversight Council Meeting on February 23, 2024. <E T="03">https://home.treasury.gov/news/press-releases/jy2122.</E> </FTNT> This collection requires reporting on NCCBR transactions, which currently comprise the majority of repo activity by several key categories of financial companies, such as hedge funds. This collection will provide visibility and transparency into a crucial segment of the U.S. repo market, the one remaining market segment for which transaction-level data is not available to regulators. <SU>2</SU> <FTREF/> <FTNT> <SU>2</SU>  Hempel, Samuel, R. Jay Kahn, Vy Nguyen, and Sharon Y. Ross. “Non-centrally Cleared Bilateral Repo.” OFR Blog. Office of Financial Research. August 24, 2022. <E T="03">https://www.financialresearch.gov/the-ofr-blog/2022/08/24/non-centrally-cleared-bilateral-repo/.</E> </FTNT> Collection of information on the NCCBR segment of the repo market is critical to understanding potential financial stability risks. The data to be collected under the Final Rule will enable the Office to monitor risks in this market. Because the Council's duties relate to monitoring and responding to potential financial stability risks, the collection will support the Office's statutory mandate to support the work of the Council. The Office issued its Notice of Proposed Rule Making (“NPRM” or “proposed rules”) for a 60-day public comment period, ending on March 10, 2023. <SU>3</SU> <FTREF/> In response, the Office received more than 30 comment letters conveying a range of perspectives. <SU>4</SU> <FTREF/> Although the majority of commenters supported the proposed collection, noting the potential benefits to the monitoring of risks to financial stability, several identified issues that the Office has addressed in the discussion below and, in some cases, through regulatory text changes reflected in the Final Rule. In making these changes, the Office intends to minimize the burden of the Final Rule while ensuring that the purposes of the collection as expressed in the NPRM and below are met. <FTNT> <SU>3</SU>  Department of the Treasury. <E T="03">Collection of Non-centrally Cleared Bilateral Transactions in the U.S. Repurchase Agreement Market.</E> Proposed Rule, 88 FR 1154 (January 9, 2023). <E T="03">https://www.federalregister.gov/d/2022-28615,</E> hereafter cited as 88 FR 1154. </FTNT> <FTNT> <SU>4</SU>  Comment letters to the proposed rules may be found at <E T="03">https://www.regulations.gov/document/TREAS-DO-2023-0001-0001/comment.</E> </FTNT> Since the publication of the NPRM, two new regulations were adopted that are relevant to the Office's collection. The Office believes that one of these will materially affect this collection. On December 13, 2023, the U.S. Securities and Exchange Commission (SEC) adopted rules under the Securities Exchange Act of 1934 (“Exchange Act”) to amend the standards applicable to covered clearing agencies for U.S. Treasury securities. The final rules require that every direct participant of the covered clearing agency submit for clearance and settlement all repo activity collateralized by U.S. Treasury securities to which it is a counterparty (the “SEC's central clearing rules”). <SU>5</SU> <FTREF/> On February 6, 2024, the SEC also adopted new rules to further define the phrase “as part of a regular business” as used in the statutory definitions of “dealer” and “government securities dealer.”  <SU>6</SU> <FTREF/> The Office has considered the likely impact of these rules on its NCCBR collection, as described below. <FTNT> <SU>5</SU>  Securities and Exchange Commission. <E T="03">Standards for Covered Clearing Agencies for U.S. Treasury Securities and Application of the Broker-Dealer Customer Protection Rule with Respect to U.S. Treasury Securities.</E> Final Rule, 89 FR 2714 (January 16, 2024). <E T="03">https://www.federalregister.gov/d/2023-27860.</E> </FTNT> <FTNT> <SU>6</SU>  Securities and Exchange Commission. <E T="03">Further Definition of “As a Part of a Regular Business” in the Definition of Dealer and Government Securities Dealer in Connection with Certain Liquidity Providers.</E> Final Rule, 89 FR 14938 (Feb. 29, 2024). (“Further Definition of `As a Part of a Regular Business' ”) <E T="03">https://www.federalregister.gov/d/2024-02837.</E> </FTNT> <HD SOURCE="HD1">II. Background and Description of the Final Rule</HD> The following discussion summarizes the proposed rules, the comments received, and the Office's responses to those comments, including modifications reflected in the Final Rule. <HD SOURCE="HD2">II(a) Structure of the Repo Market and Purpose of the Final Rule</HD> As noted in the NPRM, the collection of data pursuant to this Final Rule will support the Council, its member agencies, and the Office in carrying out their responsibilities through the use of the data to identify and monitor potential financial stability risks in the U.S. repo market. The repo market can be divided into four segments, which span the different combinations of centrally cleared and non-centrally cleared, tri-party, and bilateral repo. <SU>7</SU> <FTREF/> For three of these segments, data are currently collected by regulators. The collection under the Final Rule has been designed to fill a critical gap in regulators' information on the overall repo market by collecting data on the NCCBR segment, the last segment for which regulators do not have a transaction-level data source. <FTNT> <SU>7</SU>  88 FR 1154, 1156, citing Kahn, R. Jay, and Luke M. Olson. “Who Participates in Cleared Repo?” Brief no. 21-01, Washington, DC: Office of Financial Research, 2021. For more background, see Baklanova, Viktoria, Adam Copeland, and Rebecca McCaughrin. “Reference Guide to U.S. Repo and Securities Lending Markets.” Working Paper no. 15-17, Washington, DC: Office of Financial Research, 2015. </FTNT> As noted in the NPRM, the need for a collection of data on this segment of the market to assist policymakers' understanding of the repo market has been recognized by the Council since 2016, when it first called for the Office to establish a permanent repo data collection. <SU>8</SU> <FTREF/> This lack of visibility was felt acutely following two recent episodes of stress in repo markets. The first of these recent episodes involved a spike in repo market rates in September 2019 and the second a decline in Treasury prices, which spilled over to the repo market through higher rates, in March 2020. For both of these episodes, substantial portions of activity in these crucial funding markets could not be observed. In the wake of these episodes, market participants and the official sector have pointed ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 144k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━