Rigid margin standards risk disrupting repo markets and weakening Treasury market resilience
Washington, D.C. — MFA urged the Treasury Market Practices Group (TMPG), sponsored by the Federal Reserve Bank of New York, to maintain flexible, risk-based margin standards in its proposed updates to best practices for non-centrally cleared bilateral repos (NCCBRs) in a comment letter today.
“MFA supports efforts to enhance the resilience of Treasury markets—the foundation of the global financial system. The resilience of Treasury markets depends on preserving the ability of market participants to apply flexible, risk-based margining on repo transactions. Imposing rigid margin standards could disrupt well-functioning repo markets, reduce liquidity, and increase systemic risk,” said Jennifer Han, MFA Chief Legal Officer. “TMPG’s best practices should support flexible, proportionate risk management so firms can effectively manage exposure across portfolios and help maintain the strength and stability of Treasury markets.”
MFA supports efforts to enhance the resilience of Treasury markets. However, the proposed revisions to best practices could undermine prudent risk management practices by imposing rigid margin guidelines. Haircuts and margin are just one of several ways firms manage risk. Prudent risk management often includes other techniques like portfolio margining and counterparty credit assessments. Imposing inflexible margin requirements could disrupt liquidity and hinder firms’ ability to manage risk effectively across portfolios and weaken the resilience of the Treasury markets.
The letter also cautions that the proposed changes to the best practices are premature given the forthcoming U.S. Securities and Exchange Commission’s (SEC) Treasury clearing mandate and the U.S. Treasury Department’s ongoing collection of data on NCCBRs. Before finalizing its best practices, TMPG should wait until the central clearing mandate is in effect and policymakers have analyzed the Treasury data on NCCBR. Changing the best practices prematurely could jeopardize the resilience of the Treasury markets.
Read the full letter here.
###
