The repurchase market could get more sunlight under a new proposal announced Jan. 25 by the Securities and Exchange Commission and the Commodity Futures Trading Commission.
Under the proposal, hedge funds, private equity funds and unregistered money market funds will have to report their repurchase market activity, and other trading details, to the new Financial Stability Oversight Council which oversees systemic risk in the financial markets.
Information to be disclosed will include gross market value of repo, description of trading partner, length of term for the repo, description of the collateral, and whether repo is bilateral, tri-party or through a clearinghouse.
If approved, the requirement could help bring the giant repurchase market, currently estimated at $4 trillion to $6 trillion daily, out of the shadows, where it operates with little public disclosure and is poorly understood. Though the reports would be confidential, regulators could presumably use the data to publish more accurate analyses of the repurchase market.
The repurchase market was a key site of the credit crisis of 2007-2008, and the hidden nature of the market was a leading reason U.S. officials launched a taxpayer bailout of the banking system. Hedge funds are major players on the repurchase market, often getting repo loans from broker-dealers and others to fund their investments and speculations.
The proposed rule is required by Sections 404 and 406 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. It creates a new reporting form (Form PF) to be filed periodically by SEC-registered investment advisers. Those managing $1 billion or more in assets would have to file more often and provide more details than those managing fewer assets. The SEC estimates the higher reporting requirements would apply to about 300 managers who manage more than 80 percent of the private fund assets under U.S. management.
Regulators will now take comments on the proposal for two months. The final rule could go into effect December 31, 2011.