JP Morgan Announces Auto Substitution Functionality for US Tri-party Repo Market

JP Morgan has launched Auto Substitution, a new functionality that will enhance the operating model of the US tri-party repo market in support of the recommendations issued recently by the Payments Risk Committee-sponsored Tri Party Repo Infrastructure Task Force. Auto Substitution addresses the primary component of recommendation of the task force – implement operational enhancements to achieve the practical elimination of intraday credit by the clearing banks. It also presents the opportunity to reduce the sizeable credit risks historically associated with the US$2 trillion tri-party repo market, while allowing dealers to retain access to securities required for intra-day trading.

JP Morgan’s investment in Auto Substitution reflects its commitment to increasing the stability and reliability of tri-party repos as an essential financing vehicle. Auto Substitution minimises the use of cash as collateral and reduces unsecured depositor risk, as investors are able to remain collateralised by eligible securities intra-day as well as overnight. Through the substitution process, dealers and investors can maintain true term exposure to the counterparty with which they have contracted, reducing the need for the daily unwind without affecting market liquidity.

“Auto Substitution breaks new ground in reducing systemic risk for the US tri-party repo market,” said Kelly Mathieson, global business executive for JP Morgan’s clearance and collateral management business. “It represents a paradigm shift – the new options for both dealers and investors significantly enhance their ability to manage their collateral and mitigate risk more effectively.”


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