Repo Collateral Substitution

Repurchase agreements are financial transactions that involve the sale of a security and the subsequent repurchase of the same security. Hence the name “repurchase agreement” or “repo,” for short.

Occasionally, banks or dealers need to reclaim a security that has been sold as part of a term repo. To do this, they substitute something else of equivalent value—usually a similar security—in order to keep the repo agreement itself intact. The substitute security then becomes the collateral for the repo.

Repo transactions are processed, compared and netted along with other government securities trades each day by the Government Securities Division (GSD) of DTCC’s Fixed Income Clearing Corporation (FICC) as part of its business of handling all the post-trade processing in the trillion-dollar market for government securities. Included in this repo service is an automated facility that supports the substitution of repo collateral. To make use of the facility, participants must follow an established set of rules governing how substitution information should be communicated to FICC and when substitute collateral must be made available.

• Who Can Use this Service

  FICC Government Securities Division (GSD) repo netting members involved in direct or brokered trades are eligible to use the Repo Collateral Substitution service. For brokered repo trades, which make up the bulk of repo transactions, the Repo broker who executed the trade is responsible for coordinating the substitution and sending the substitution request to FICC.

• Benefits

  GSD’s Repo Collateral Substitution service:

  • Provides an automated methodology that streamlines the substitution of collateral,
  • Reduces risk by facilitating smooth collateral settlement at clearing banks,
  • Allows participants to notify the GSD of a substitution before replacement collateral is known, minimizing costs of allocating collateral later in the day.

• How the Service Works

  Members of FICC’s Government Services Division use their GSD computer terminal connection or the RTTM Web Front End to access GSD’s automated collateral substitution facility. Since the bulk of repo trades are “blind-brokered” by Repo brokers, which means the two sides to the transaction do not know the identity of the other party, the broker must first receive the necessary information from the sell party in the trade. The broker then has until 11 a.m. EST to file a substitution notice that provides information about the repo trade to be substituted, including the original security involved and other aspects of the trade. As soon as GSD receives this substitution notice, clearance instructions are automatically created to receive the original collateral from the reverse party and deliver it back to the selling dealer. At this point in the process, GSD only needs to know that a substitution is planned and that the original collateral has been returned. It does not need to know exactly what the substitute will be. Instead, GSD substitutes general collateral for any replacement allocations that may not arrive in time, which allows it to support the contract until the actual substitute collateral is in place.

  By noon, participants must update their substitution request to tell the GSD precisely what replacement collateral they will assign to the repo. As soon as this information is communicated to GSD, its systems create final receive-and-deliver instructions to receive the replacement collateral from the repo dealer and deliver it to the party on the other side of the transaction. Participants who fail to notify GSD about substitution requests before noon must pay a fine and, under SEC rules, any substitution requests or details that come in after 1 p.m. will not be processed until the following day.

  Substitution needs tend to increase at the end of each quarter when term repo transactions settle, prompting firms to recall securities they need to allocate to newly starting term repos or to satisfy outstanding firm sells.

• Collateral Substitution Timetable

  Substitution deadlines are listed in the tables below. All late fees are assessed to the repo dealer. Because of the time-sensitive nature of the transaction, however, FICC charges a substantial fee for late substitution requests and allocations on a normal business day.

  Refer to GSD Rules for the full list of substitution timeframes and late fees.

  Standard Substitution Schedule
  	Before 11:00 am	After 11:00 am	After noon	After 12:30 p.m.	After 1:00 p.m.
  Notification sent	No late fee	Late fee charged	Late fee charged	Processed on "good faith" basis only	No action until next business day
  Allocation sent	No late fee	No late fee	Late fee charged	Processed on "good faith" basis only	No action until next business day

  
  
  

  Substitution schedule on a designated “high volume” substitution day
  	Before 11:00 am	After 11:00 am	After 1:00 pm	After 1:30p.m.	After 2:00 p.m.
  Notification sent	No late fee	Late fee charged	Late fee charged	Processed on "good faith" basis only	No action until next business day
  Allocation sent	No late fee	No late fee	Late fee charged	Processed on "good faith" basis only	No action until next business day

  
  
  

• For More Information

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