JPMorgan to Stop Settling Government Securities for Dealers

  • Shift would leave BNY Mellon dominating niche of repo market
  • Rising cost of transactions sparks move, seen by end of 2017

JPMorgan Chase & Co. plans to exit the business of settling government securities for most dealers by the end of 2017, including some transactions in a key corner of the $1.6 trillion repurchase-agreement market.

The departure from the business of facilitating settlement of such trades with 30 dealers and broker-dealers, a fraction of the bank’s hundreds of clients, comes as the company focuses on more profitable areas like prime brokerage and custody services.

JPMorgan’s shift means that Bank of New York Mellon Corp. will be the only remaining institution handling these back-office type activities in a niche of the repo market known as general-collateral finance, where dealers turn for financing.

“We are exiting the government-securities settlement service that we provide to dealers, including the settlement of GCF repo,” said Michael Albanese, managing director in investor services at JPMorgan in New York, in an interview. “This area is not core to our growth strategy. But we will continue to settle Treasuries in the context of the other business that we support.”

Crisis Ripple

The move is the latest showing how post-crisis rules have changed banks’ relationship with some clients. JPMorgan, Wall Street’s biggest firm by revenue, has halted clearing services for hundreds of non-U.S. banks, dropped some small hedge funds and pushed away $150 billion in deposits from institutional clients. It has also discontinued checking accounts for what it deemed “politically exposed persons.”

U.S. banks, and not just those that provide settlement services, have been stepping back from the repo market as a business that used to be low cost and high volume lost its allure as a result of heightened liquidity requirements and capital expenses. The Fed’s 23 primary dealers, a group that includes JPMorgan, use repos for financing, with money funds among the key cash providers.

The GCF repo market, where dealers finance more than $200 billion in securities daily, is the only slice of the tri-party repo market that’s centrally cleared. The Depository Trust & Clearing Corp.’s Fixed Income Clearing Corp. serves as the clearing agent for the agreements.

In a tri-party arrangement, a third entity, either JPMorgan or BNY, serves as the middleman to settle the deals and safeguard the collateral that’s behind them.

‘Leading Franchises’

JPMorgan’s announcement means it will no longer settle government and government-related securities in cash dealings or through GCF repo with dealers. It will continue to do such transactions for other clients, such as those using prime-brokerage or custody services.

“We have built our custody, collateral management, prime brokerage and Treasury services business into leading franchises, and in no way are those growing businesses affected by this decision,” Brian Marchiony, a JPMorgan spokesman in New York, said in an interview.

“Treasury has been in regular communication with JPMorgan about its plans” for government-securities settlement services, said Rob Runyan, a Treasury spokesman, in an e-mail. “We are coordinating with JPMorgan and the Federal Reserve to manage a smooth transition. We are fully confident that Treasury securities will continue to trade and settle in the usual manner.”

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