Repo market set for volatility in late clearing push, CIBC says

Skip to Content News Archives Economy Defence Energy Oil & Gas Renewables Electric Vehicles Mining Commodities Agriculture Real Estate Mortgages Mortgage Rates Finance Banking Insurance Fintech Cryptocurrency Defence Work Wealth Smart Money Wealth Management Investor Personal Finance Family Finance Retirement Taxes High Net Worth FP Comment Executive Women Puzzmo Newsletters Financial Times Business Essentials More Innovation Information Technology FP500 Podcasts Small Business Lives Told Tails Told Shopping Financial Post Store Obituaries Place a Notice Advertising Advertising With Us Advertising Solutions Postmedia Ad Manager Sponsorship Requests Classifieds Place a Classifieds ad Working Profile Settings My Subscriptions My Offers Newsletters Customer Service FAQ News Economy Energy Mining Real Estate Finance Defence Work Wealth Investor FP Comment Executive Women Puzzmo Newsletters Financial Times Business Essentials This advertisement has not loaded yet, but your article continues below.HomeFinanceBankingRepo market set for volatility in late clearing push, CIBC saysThe chances of 'moderate moves' are high enough that major repo borrowers should hedge some of their risk.Author of the article:Last updated 31 minutes ago CIBC signage in Toronto’s Financial District on September 16, 2024. Photo by Peter J. Thompson/National PostU.S. funding markets risk facing a volatile, last-minute “scramble” to meet a key 2027 deadline for mandatory central clearing of daily transactions, strategists at Canadian Imperial Bank of Commerce warned.THIS CONTENT IS RESERVED FOR SUBSCRIBERS ONLYSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.SUBSCRIBE TO UNLOCK MORE ARTICLESSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.REGISTER / SIGN IN TO UNLOCK MORE ARTICLESCreate an account or sign in to continue with your reading experience.Access articles from across Canada with one account.Share your thoughts and join the conversation in the comments.Enjoy additional articles per month.Get email updates from your favourite authors.THIS ARTICLE IS FREE TO READ REGISTER TO UNLOCK.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one accountShare your thoughts and join the conversation in the commentsEnjoy additional articles per monthGet email updates from your favourite authorsSign In or Create an AccountJust eight months ahead of the June 2027 deadline, clearing volumes of repurchase agreements have flattened after slowing in the first months of the year, according to a report from the International Swaps and Derivatives Association. The drop is “deeply disheartening,” CIBC strategists led by Michael Cloherty wrote in a note Friday.This advertisement has not loaded yet, but your article continues below.“This isn’t to suggest that major players won’t be compliant,” they wrote. “Instead, the concern is that a scramble to become compliant distorts market pricing/capacity,” pushing repo rates higher around the compliance date.Breaking business news, incisive views, must-reads and market signals. Weekdays by 9 a.m.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Posthaste will soon be in your inbox.We encountered an issue signing you up. Please try againEven though the strategists don’t expect wild swings in pricing as a result of central clearing, Cloherty said the chances of “moderate moves” are high enough that major repo borrowers should hedge some of their risk.The deadline for mandatory central clearing of repo is June 30, with regulators warning market participants to be prepared well before then. Still, several operational and economic questions remain unresolved, including decisions that could increase both transaction costs and collateral requirements for centrally cleared trades.“We believe that a meaningful portion of the market faces higher costs under cleared repo, so they are waiting until closer to the deadline before fully shifting to clearing,” the CIBC strategists wrote.At an International Securities Lending Association conference earlier this month, money managers indicated that roughly 25 per cent of central-clearing documentation has been completed, according to Curvature Securities executive vice president Scott Skyrm. They expect another 25 per cent to be finished by June, meaning they may launch with only half of their current counterparties connected to the clearing framework.This advertisement has not loaded yet, but your article continues below.Another issue is waiting for the U.S. Securities and Exchange Commission to rule as to whether there will be a broad exemption of offshore and affiliate trades from central clearing, which could reduce potential distortions.If most affiliate trades are counted, it would become more expensive for large banks to shift liquidity or collateral between entities, and institutions would need to hold more liquidity across the organization, the CIBC strategists said. That could reduce balance-sheet flexibility and contribute to more erratic pricing during periods of stress until firms optimize for the new market structure.As with any regulatory-driven change, participants may need time to adapt to the new framework, meaning growing pains could persist into 2028, the strategists said, citing lessons learned from the rollout of Basel III liquidity rules that were introduced after the 2008 financial crisis.“Despite an extended phase in, there were significant market distortions until banks were able to restructure to optimize capacity under the new rules,” they wrote. “But that took years.”This advertisement has not loaded yet.Notice for the Postmedia NetworkThis website uses cookies to personalize your content (including ads), and allows us to analyze our traffic. Read more about cookies here. By continuing to use our site, you agree to our Terms of Use and Privacy Policy.