In the latest installment of the Office of Financial Research ("OFR") Brief Series, analysts estimated that risk exposure for dealers could be reduced by up to 81% if U.S. Treasuries repo services were extended to Central Counterparties ("CCP"). The analysts stated that this "potential reduction of exposures provides an economic incentive for repo market participants to use a repo CCP for dealer-to-non dealer transactions." The trade-off is that such an extension would increase the risk exposure for the CCP by as much as 75%.
The brief listed the following caveats: (i) a narrow focus "on direct economic benefits to market participants and increased exposure to CCP"; (ii) a lack of consideration of other potential benefits of central clearing (e.g., increased transparency); (iii) the use of data from a small group of dealers in 2015; and (iv) the volumes of transactions and the composition of market participants are unlikely to remain the same as they were during the study period.
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