MNI INSIGHT: OFR Nears Proposing Rule To Fill Repo Data Gap

The U.S. Office of Financial Research plans soon to ask for public comment on its plan to collect data on the opaque non-centrally cleared bilateral repo market, MNI understands, in what would be a step toward better understanding the risk that hedge funds' growing presence in short-term funding markets poses to the financial system.

The OFR, an arm of the Treasury Department created by the 2010 Dodd-Frank Act to promote financial stability, would be filling in a key gap in data in the largest segment of the repo market that also contains a greater share of riskier collateral. OFR estimates that primary dealers' exposure to non-centrally cleared bilateral repos doubled in 2022 from previous years to more than USD2 trillion.

The data collection moves are part of a wider effort by regulators to better identify emerging risks in short-term funding markets, particularly after the March 2020 Treasury market meltdown highlighted the previously-unknown extent of hedge fund leverage in repos.

The OFR has already gathered some repo data from nine volunteer institutions for three days in June. Now the agency is hammering out the final details of its advance notice of proposed rulemaking on reporting exposures, hoping to minimize bureaucratic burdens, MNI understands. It is unclear how long it would take to issue a final rule, after a multi-step process including gathering comments from investors and the general public.

TREASURY MARKET REFORM

In 2021, FSOC reestablished its Hedge Fund Working Group, an interagency staff-level working group, that recommended the OFR consider ways to obtain better data on uncleared bilateral repurchase agreements, an important source of leverage for hedge funds.

The Treasury Department also recently solicited public comment on ways to increase transparency in the USD24 trillion Treasury market. (See: MNI INTERVIEW: Treasury Market Reform Efforts To Ramp Up - Liang)

Market participants and legislators generally encouraged the Treasury Department to continue efforts to promote post-trade transparency, but some investors cautioned of potential risks to the ability to trade both larger sizes and less liquid issues.

Federal Reserve Vice Chair for Supervision Michael Barr is set to give his first public remarks in his position later this week, which are likely to be closely watched for clues on his approach to the supplementary leverage ratio and his assessment of market capital and liquidity.