MFA Comment Letter Provides OFR Fixes to Mitigate Negative Ramifications of Non-Centrally Cleared Repo Market Proposal

Jennifer Han: “MFA has outlined recommendations that will mitigate unintended harms to the repo market while delivering OFR the data needed to monitor for financial risks.”

WASHINGTON, DC – Today, Managed Funds Association (MFA), the trade association for the global alternative asset management industry, submitted a comment letter to the U.S. Department of the Treasury’s Office of Financial Research (OFR) in response to its proposed rule on data collection for non-centrally cleared bilateral repo transactions. The proposal would establish reporting requirements for financial firms, including private funds, whose average daily total outstanding commitments to borrow cash and extend guarantees through non-centrally cleared bilateral repo contracts over all business days during the prior calendar quarter is at least $10 billion.

MFA’s comment letter expresses support for regulators improving data collections to help identify and monitor risks to financial stability but suggests that the proposed rule will have the unintended effect of reducing counterparties for private funds, increasing concentration, and decreasing liquidity in the repo market. MFA’s letter presents OFR with recommendations that will balance providing regulators with decision-useful data on non-centrally cleared bilateral repo transactions with mitigating unintended disruptions to the orderly operation of the market.

“OFR’s proposal will hurt the well-functioning repo market by limiting the counterparties available to private funds, which will increase concentration and decrease liquidity. MFA has outlined recommendations that will mitigate unintended harms to the repo market while delivering OFR the data needed to monitor for financial risks,” said Jennifer Han, MFA Executive Vice President, Chief Counsel, Head of Global Regulatory Affairs. “Regulators need the tools to monitor markets to ensure they are efficient, fair, and liquid, but this proposal is overly burdensome given there are simpler methods for capturing data OFR is seeking on non-centrally cleared bilateral repo transactions.”  

The proposal appears to require dual-reporting obligations where both the buy-side and sell-side parties to a repo would have to submit transaction information to OFR. MFA’s letter recommends OFR adopt a reporting regime similar to what is used in the swaps market, where sell-side firms have primary reporting obligations. From the letter:

“We believe the OFR should take an approach that is similar to the approach in the swaps market, where reporting obligations are allocated by statute and rule to the counterparty that is a swap dealer or major swap participant.  In other words, to avoid imposing a new and costly reporting obligation on private funds and other buy-side entities, the Proposal should instead impose the reporting obligation only on sell-side entities, which are accustomed to complying with reporting requirements. This approach would improve the quality of information that OFR receives because sell-side entities are better equipped to comply with reporting obligations that are on a T+1 basis (e.g., with respect to reporting securities transactions), unlike buyside entities that typically report transaction and business information on a much more delayed basis. … Unless OFR takes this approach, the Proposal will have the unintended consequence of incentivizing buy-side entities like private funds to limit their repo counterparties to just entities that are . . . covered reporters [under the rule].”

MFA’s full comment letter can be found here.

About the Global Hedge Fund and Alternative Asset Management Industry

The global hedge fund and alternative asset management industry, including hedge funds, credit, managed futures, and hybrid funds that invest in private companies, has assets under management of $4 trillion (Q4 2022). The industry serves thousands of public and private pension funds, charitable endowments, foundations, sovereign governments, and other global institutional investors by providing portfolio diversification and risk-adjusted returns to help meet their funding obligations and return targets.

About the Managed Funds Association

Managed Funds Association (MFA), based in Washington, DC, New York, and Brussels, represents the global alternative asset management industry. MFA’s mission is to advance the ability of alternative asset managers to raise capital, invest, and generate returns for their beneficiaries. MFA advocates on behalf of its membership and convenes stakeholders to address global regulatory, operational, and business issues. MFA has more than 150 member firms, including traditional hedge funds, crossover funds, and private credit funds, that collectively manage nearly $2 trillion across a diverse group of investment strategies. Member firms help pension plans, university endowments, charitable foundations, and other institutional investors to diversify their investments, manage risk, and generate attractive returns over time.