SEC IM Gives Guidance on Repo
We learned from Joan Swirsky at Stradley, Ronon, Stevens & Young that the SEC's Division of Investment Management has posted a "`Guidance Update entitled, "Counterparty Risk Management Practices with Respect to Tri-Party Repurchase Agreements. It says, "The Financial Stability Oversight Council ("FSOC"), in its May 2013 Annual Report, highlighted certain potential financial stability risks in the tri-party repurchase agreement market (commonly known as the "tri-party repo market") if concerns emerge regarding the financial condition of borrowers in this market, such as securities broker-dealers. Money market funds have significant portfolio holdings of tri-party repos (approximately $591 billion at the end of 2012). Even though many money market funds may stop rolling over repo holdings of a counterparty that comes under financial pressure, it is possible that a money market fund could face the sudden default of a tri-party repo. Accordingly, as a matter of prudent risk management, money market funds and their investment advisers are encouraged to consider the legal and operational steps they may need to take if a repo counterparty fails and the repos it issued default. The staff notes that while many different kinds of mutual funds may hold tri-party repos (and thus this staff guidance note may be useful to mutual funds generally), the staff is addressing this communication largely to money market funds because these funds tend to have more significant portfolio holdings of tri-party repos than other types of mutual funds. There are a variety of ways in which a money market fund and its adviser may be able to prepare in advance for handling a default of a tri-party repo held in the fund's portfolio. Such advance preparation could be part of broader efforts by the money market fund and its adviser to follow best practices in risk management and engage in appropriate advance planning to be prepared for the default of any type of portfolio security."
