December 5, 2013
Dear SEC,
As an unaffiliated senior financing market professional with 30+ years of experience in the money and collateral markets, I would like to provide an un-conflicted opinion on this innovative. This is a far reaching decision made my the leadership of DTC to provide a sound beginning to the process of bringing in the buy-side into the CCP structure.
I have been studying the development of the clearing structures since the early '80's when I had worked for the NY Fed and have been at many different financing and funding desks as a front line risk manager during many crisis situations. I feel strongly that the CCP structure is the main solution to many of the potential problems affecting the financial stability of the system. FICC's platform has a developed mature infrastructure and a very strong risk management culture. It is a utility whose main role is strictly to process trades for the industry but mostly the sell side. It is clear from history that the FICC acting as a CCP has been a major mitigating factor for many of the risks that have faced the markets during the many crisis situations it had to encounter. The FICC has a long record of risk management that was essential in managing the 9/11 crisis and the various episodes of the credit crisis. Its ability to arrange for the orderly unwind of complex collateral positions during periods of stress is an obvious benefit filling the role of a liquidation agent. Its strong quantitative approach to monitoring exposures and its margin maintenance methodology are another obvious discipline that has been observed during crisis periods.
In my last position running a large matched book business at a foreign bank, I had a front seat to many of the problem situations that developed during the crisis. As a desk head who has relied on FICC during these difficult times, I appreciate the risk mitigating factors that FICC had employed in the crisis situations that have occurred over the last two decades. I have recently been involved in some aspects of Tri-party reform but feel that these changes thus far have largely been cosmetic and do not address the needs for change to improve the financial stability of this conflicted vehicle. I have made a number of attempts to allow the RICs access to GCF repo as an alternative to Tri-party repo that is currently arranged at the two custodian banks whose role in this process grew over time to present a huge systemic risk to the system. It is clear that the Tri-party repo vehicle is in need of structural change given the experiences with Bear Sterns and Lehman Brothers during the credit crisis. Given the recent attention given to the risks of Tri-party repo by the Fed it is clear that a CCP structure has to develop in the market to support the financing markets particularly during credit events.
The two clearing bank model is out dated and the inherent conflicts in the relationship between the clearing banks, the dealers and the customers need a true non conflicted utility to manage the risks particularly noticeable during a credit event. The regulations that followed the crisis largely ignored the repo markets while Dodd-Frank brought reform to the OTC derivative markets which have now enshrined in the CCP model. I believe the FICC's role in this new model for the RICs is a bold first step towards improving the financial stability of the system and this is something the regulators need to support. This decision should be applauded by the regulators as it is a aggressive move by FICC to materially improve the stability of the system. In particular this move should be supported by the regulators as it largely works to dismantle a huge profit center for the dealer community and thus is likely to see a great deal of resistance from the industry.
The FICCs move to allow RICs to the netting platform without the risk on mutualization is a forward looking initiative on the part of DTC as it challenges the current structure of the system. The RICs business model is heavily reliant on the bilateral nature of the repo markets and thus their entrance into a CCP structure minimizes the flight to quality risk which is such an important factor during periods of stress. This initiative invites conflict with the industry which is typically resistant to change but it is a step in the right direction. I believe once the infrastructure for this netting arrangement is solidified FICC will extend this service to GCF repo as an alternative to the current Tri-party vehicle. This would greatly de-risk the system allowing a 1.8 trillion systemic risk to decline to a more manageable risk. The FICC's risk management process is a great value to the workings of the markets and I hope this attempt is successful as it would provide for a more stable and risk managed funding market.
Sincerely yours,
Peter Nowicki